Do Student Loans Affect Everyone Equally?

It’s probably not breaking news that racial disparities exist in many facets of life in America, finances included. We know the racial wealth gap is real. In fact, we made a YouTube video a while back about it.

In this post, we’re going to explore the racial disparities that exist specifically as it relates to student loans and their effects, and discuss what we can do about it.

If you’re more of the video type, check out the YouTube video above!

Borrowing Rate Disparities
The first area where we see disparities is in the proportion of students who take out student loans in the first place. Data shows that Black students borrow federal student loans at higher rates than other groups of students. About 78% of black students borrow federal student loans to pay for college. This percentage is pretty high when compared to the national average for all students at 60% and white students at about 58%. This holds true at public and private, two-year and four-year, and for-profit and nonprofit schools. However, the disparity is greatest at public four-year colleges, where black students borrow at a rate of about 87%.

Hispanic students also borrow disproportionately high rates: 65% at public four-year colleges and about 74% at private four-year colleges. However, Hispanic students tend to borrow at lower rates for public two-year colleges compared to white and black students.

Student loan borrowing rates are extremely high across the board when it comes to for-profit colleges. For-profit colleges have come under fire in the past for their questionable practices, and we often hear of graduates feeling defrauded and not getting what they were promised. Students of color are overrepresented at for-profit colleges and universities. This is why some racial equity focused impact investing strategies seek to exclude for-profit colleges.

Potential Solutions:

What can we do to help close the borrowing gap? Here are some tips. First, be mindful of the type of school you wish to attend. You might decide that starting out at a public, 2 year school might work out better for you financially than jumping straight into a 4 year college or, worse yet, a for-profit university.

Look for every opportunity to obtain free money for school. Try securing external scholarships and also ask about every internal scholarship or grant opportunity available at the college you wish to attend. Appeal to any endowment committees if you need some extra financial help. If you work for an employer who might be willing to help cover the costs of your education, ask about that. If you have the ability to work to help cover some of the costs of your education, do that.

Default Rate Disparities

The second area we see disparities is in student loan default rates. When we say default we mean that you haven’t made student loan payments in 9 months. The National Center for Education Statistics studied default rates among students who started college in 2003. It found that nearly 50% of black students had defaulted on a student loan within 12 years of starting school. That rate was 36% for Hispanic students and 22% for white students. These default rate disparities hold true even when accounting for the type of college students attended and whether they graduated.

Defaulting on your student loans can have detrimental impacts on a borrowers’ credit and on their overall financial stability. If your federal student loans go into default, the entire unpaid balance of your loan and any interest you owe can become due immediately. This process is also called acceleration. You may no longer be eligible to receive deferment or forbearance, and you lose eligibility for other benefits, such as the ability to choose a repayment plan. You lose eligibility for additional federal student aid. Your tax refunds, federal benefit payments, and wages can be garnished and applied toward repayment of your defaulted loan. Your loan holder can take you to court. You may be charged court costs, collection fees, attorney’s fees, and other costs associated with the collection process.

Your school even has the power to withhold your academic transcript until your defaulted student loan is satisfied if they so choose. We really want to avoid federal student loan default at all costs.

Potential Solutions:

So what can we do to reduce default rates? It’s really important to know your options when it comes to student loan repayment. Consider switching to a different repayment plan that might give you a lower monthly payment. Or consider proactively requesting that your loans be put into deferment or forbearance status.

There are several circumstances under which you may qualify to have your federal student loans put into deferment. During deferment, no payments will be required. However, your loans will continue to accrue interest. Qualifying circumstances include cancer treatment, economic hardship, if you’re enrolled in a graduate fellowship, if you’re still in school or go back to school at least half-time, you’re on active military service, you’re a parent plus borrower whose child is in school at least half-time, or you’re unemployed.

Forbearance is another potential option. During forbearance, your monthly loan payments are temporarily suspended or reduced. Your lender may grant you a forbearance if you are willing but unable to make loan payments due to certain types of financial hardships. Just like with deferment, interest will continue to accrue on your loans.

Keep in touch with your student loan servicer. More communication is always better than less in a case like this.

Graduation Rate Disparities

The third disparity we’ve found is that Black students with student loans are graduating college at lower rates than their counterparts. Among bachelor’s degree-seeking students entering a four-year program in 2008, just 21% of black students graduated from college in four years. Compare that to the 30% of Hispanic students, 44% of white students, and 48% of Asian students who graduated within that time frame.

Why is this? Many students enter college and are then forced to drop out because they can’t afford to continue or might become overwhelmed from trying to juggle their course load with working and other responsibilities. Or even if they do finish, they take a lot longer than their peers to complete their degrees.

Lower graduation rates means lower income and earning potential, which can contribute to growing student loan balances over time and higher default rates.

Potential Solutions:

Student loan debt is a huge problem in the United States, and especially in Black and Hispanic communities. Short of any federal relief, let’s do what we can to help effect change. If you’re still pretty early in the college game, research, research, research as much as you can. Know your options in terms of the schools you might choose to attend. Understand the consequences of taking out student loans as early as possible and aim to create a proactive plan to tackle them. See what kinds of free financial support are out there. Understand your repayment options. If you sense any danger on the horizon when it comes to your ability to keep up with your loan payments, make sure to keep in close contact with your loan servicer. This is a great way to reduce the risk of anything affecting your credit and overall financial health. More and more employers are instituting employee benefits related to student loan paydown these days and we hope to see more of these kinds of initiatives in the future.

We dive deep into tackling debt repayment and so much more in our program, MONEY 180™, so if you’re interested in learning more about that, go on and check it out!