Racial Divides Found in Student Loan Defaults

Style Magazine Newswire | 7/3/2018, 2:04 p.m.
With 44 million consumers owing student debt that now reaches $1.5 trillion and still climbing, a lot of people want ...
Charlene Crowell

By Charlene Crowell

With 44 million consumers owing student debt that now reaches $1.5 trillion and still climbing, a lot of people want to better understand how and why this unsustainable debt trajectory can be better managed. For Black consumers who typically have less family wealth than other races and ethnicities, borrowing is more frequent, and as a result, often leads to five figure debts for undergraduate programs and well beyond $100,000 for graduate or professional degrees.

Besides deep debt incurred to gain a college education, another sphere of concern presents yet another financial hurdle: student loan defaults.

New research by Judith Scott-Clayton of the Brookings Institution focuses on explaining these defaults and what happens once they occur. Her research shows that a large racial gap exists in default rates between Black student loan borrowers and their White counterparts. This gap can only be partially explained by controlling for multiple socio-economic and educational attainment factors.

After accounting for variations in family wealth and income, differences in degree attainment, college grade point average and even post-college income and employment, a stubborn and statistically significant 11 percentage point gap remains between Black and White student loan borrowers. Before adjusting for these factors, the gap is 28 percent, with Black borrowers defaulting at a rate of more than double that of Whites -- 49 percent compared to 21 percent over 12 years.

The research also finds a strong disadvantage to attending for-profit colleges, in which Black students disproportionately enroll. More than a decade after leaving school, and accounting for the same background and attainment factors listed above, loan defaults of for-profit college borrowers exceed those of two--year public sector peers by 11 percent.

The author points to the need to understand what influences the “stark” remaining divide.

“The better we can understand what drives these patterns,” wrote Scott-Clayton, “the better policymakers can target their efforts to improve student loan outcomes.”

Among these influences are the widening racial wealth gap. As Black student debt is typical heavier and often takes longer to repay, the ability to build wealth becomes a heightened challenge. Years that might have been opportunities to become homeowners or begin other investments can have lengthy deferrals due to large student loan debts.

Similarly, a new report by the Consumer Financial Protection Bureau (CFPB) that focused largely on student loan repayment reached a similar conclusion. Authored by Thomas Conkling, the new CFPB research examining borrowers who were unable to fully repay their student loans early, “suggests that their required monthly student loan payments constrained their ability to pay down other debts.” CFPB also found that the typical student loan repayment lasts a full decade with equal monthly payments. Further, borrowers repaying on schedule are not more likely to become first-time homeowners.

A portion of the Brookings report provides useful information that could help those at risk or in default. Loan “default is a status, not a permanent characteristic.” Four ways to get out of default are cited: rehabilitation, consolidation, paying in full, or have a loan discharged.