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“student Loans And Cultural Factors: Exploring Borrowing Norms” – Andre M. Perry, Andre M. Perry Senior Fellow – Metro @andreperryedu Marshall Steinbaum, Marshall Steinbaum Senior Fellow – Higher Education Finance, Jane Family Institute, Assistant Professor of Economics – University of Utah @econ_marshall Carl Romer Carl Romer – Former Fellow at Metro Policy Program @_cromer043
If you missed it, check out our June 28 webinar with a panel of experts discussing the implications of student debt relief.
“student Loans And Cultural Factors: Exploring Borrowing Norms”
“Whatever you want to do with your life, I guarantee you, you’ll need an education to do it,” President Barack Obama said in his 2009 national address to students. This is the kind of instruction black people are told all the time: The way out of poverty and into middle-class status is to get a college degree.
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But a college degree doesn’t close the income gap between black and white workers. Black students finance their educations through debt, so college degrees further contribute to the fragility of the mobile black middle class. And because education does not achieve income parity for black workers, the disproportionate amount of debt black students take on to finance their education reinforces the racial wealth gap. Today, the average white family has about 10 times the wealth of the average black family, and white college graduates have seven times the wealth of black college graduates.
Most experts believe that the United States has a student debt problem, even conservative scholars acknowledge that some debt should be forgiven. According to the Pew Research Center, tuition continues to outstrip students’ ability to pay, and from 1993 to 2012, the share of students who took out loans to finance their degrees increased from about half (49%) to two-thirds (69%). Between 1993 and 2020, the average loan amount nearly tripled to more than $30,000.
Past discrimination should compel researchers and experts to seek solutions to the student debt crisis based on the Black experience. The black-white wage gap is worsening, and black communities are increasingly indebted. If we can create systems that recognize these lived experiences, we can create more equitable outcomes for everyone.
Disagreement over the magnitude of the student debt problem is based on the positive correlation between education level and income. Scholars who discount the problem of student debt suggest that the relationship is causal, and that student borrowers are able to pay off their loans mainly because of the higher incomes that finance their loans. However, focusing too much on income can lead researchers to mistakenly assume that people with similar incomes are equally likely to repay their student loans.
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Regardless of their post-graduation earnings, black households carry more student debt, which lowers their creditworthiness. Not surprisingly, college-educated blacks have lower homeownership rates than white high school dropouts. Additionally, research from the Federal Reserve Bank of St. Louis found that after college, white households receive wealth transfers from their families to help pay for things like buying a home. Black households, on the other hand, use their increased post-college earnings to help support their families. Different patterns of intergenerational transfers contribute to the fact that three-quarters of black borrowers’ student loans today have higher balances than they originally did.
The nation’s tax system invisibly subsidizes high-net-worth households that use Coverdell and 529 education savings accounts to make tuition fees work as tax-deductible generational transfers. For students with education debt, the IRS allows taxpayers (married or single) to deduct up to $2,500 of student loan interest from their taxes each year. This means that borrowers with high debt will deduct only a portion of their interest payments. According to our colleagues, four years after graduation, the average black college graduate owes $52,726, compared to $28,006 for the average white college graduate. With federal interest rates between 2.75% and 5.3%, the average white household deducts their entire interest payment each year, while the average black household does not. The tax system prevents low-income, high-income households from catching up with high-income households.
The most common argument against eliminating student debt is that it would be regressive: Because student debtors have a college education, they are better off than those who did not. A change in this requirement means that borrowers with higher balances will have higher incomes. The first requirement is based on comparing student borrowers with those without student debt (and imputing income for each group), while the latter concerns comparisons between borrowers.
Neither is true. First, having student debt doesn’t mean going to college, let alone graduating. Many families take out student loans to contribute to the education of their children and grandchildren; Indeed, policy encourages this in the form of parent PLUS loans, which institutions actively market to students’ parents.
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Second, having student debt means that the debtor’s family has not paid for college. More and more people are going to college, which means that the number of people with student debt in this group is made up of people who financed college themselves. For this reason, having student debt is a sign of relative disadvantage because it means that the student’s family has not paid the tuition.
Finally, the student debt cancellation proposals would eliminate most of the loans for which the federal government is a creditor. But the private student loan refinancing market exists to offer generous terms to creditworthy borrowers. Borrowers refinanced from the federal system earn the highest incomes and are less likely to default, so the beneficiaries of the cancellation will be the lowest income student loan borrowers.
The second half of the claim—that student loan balances, in dollar terms, are positively correlated with income—is true in a static sense, but that doesn’t mean student debt elimination is regressive. Figures 3 and 4 below show the relationship between loan balances and census tract median income for a cross-section of student loan borrowers in 2009 and 2019. (We don’t specifically control for borrowers’ income, so we calculate it based on the median income in the area where they live.) They show that loan levels are rising rapidly, and that student debt as a share of income is highest and growing fastest in the lowest-income areas.
Therefore, the claim that student debt relief is regressive is false. We measure regressivity in terms of income (or wealth), not raw dollar amounts. The latter metric means that Social Security is a regressive welfare program because it pays higher benefits to high-income beneficiaries, and consumption taxes are progressive because high-income consumers spend more dollars on their own consumption. Of course, Social Security is widely and rightly considered the federal program that does the most to reduce poverty, and consumption taxes are canonically regressive taxes because poor people spend most of their income on consumption and save little. Because loan balances as a share of income are highest for low-income borrowers, and so negative for low-income borrowers (many of whom have negative balances due to student debt), student debt cancellation creates income. and wealth distribution becomes more equal and almost eliminates negative net worth households from the wealth distribution. This is the definition of a progressive program, not a regressive one.
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The picture of who has student debt is further explored by looking at the intersection of income, loan amount, and likelihood of borrowing. Figure 5 below shows the number of borrowers with an outstanding balance according to the average income of the settlement tract. Figure 6 shows the total loan balance by census tract median income—that is, what is the total amount of outstanding debt owed by borrowers with a given aggregate balance and living in a tract with a given income?
The claim that student debt relief is regressive suggests that a large number of borrowers have little debt and that a relatively small number of borrowers carry a large portion of the total debt burden. This is true, but the unspoken result is that the small number of borrowers with high balances who stand to benefit the most from eliminating outstanding balances will also have high returns.
This conclusion is false. Borrowers with high balances who live in census tracts with median incomes between $20,000 and $40,000 own the majority of outstanding loans. Additionally, high-income census tracts account for very few borrowers, meaning the better-off have less student debt. The claim that student debt relief is regressive is based on a misunderstanding of who has and who has student debt. It overstates the positive cross-correlation between credit balances and income and misunderstands the definition of regressivity in the first place.
There’s another good reason to avoid student loan debt: For many borrowers, it’s never paid back. In fact, current policies encourage non-return while failing to address its consequences. That’s why
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