Biden’s student loan forgiveness not enough for black borrowers

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In 2018, Aaricka Washington took out $100,000 in student loans.

The money covered a master’s degree and living expenses for a 10-month journalism program at Columbia University. It was Washington’s first experience with student loans: She received an income-based scholarship to attend Indiana University for free as an undergraduate. But after graduating, she felt compelled to get a master’s degree from a prestigious school to land a better-paying job.

The result has been a mountain of debt that far dwarfs the $10,000 she will earn in forgiveness from President Joe Biden’s new student loan plan. Like many other black borrowers, Washington says she feels left out.

“It’s just a drop in the bucket for me,” Washington, 30, associate editor at nonprofit media outlet LAist, told CNBC Make It. “There is no one in my family who gave me thousands of dollars to go to school. I had to do it myself.”

Aaricka Washington, 30, took out loans to cover a master’s program at Columbia University. She says President Biden’s student loan forgiveness plan is “a drop in the bucket for me.”

Courtesy of Aaricka Washington

Black students and graduates take out more student loans than the average white borrower, and they find it harder to repay their loans. our years after graduation, the average black borrower owes $53,000, while the average white borrower owes $28,000, according to the Brookings Institute.

After that same four-year period, 48% of black students owe an average of 12.5% ​​more than they originally borrowed, while 83% of white students owe 12% less, according to the Education Data Initiative. .

Statistics like this lead some experts to say that black borrowers specifically need more than $10,000 in loan forgiveness. Andre Perry, a scholar-in-residence at American University specializing in race, structural inequality, and education, says Biden’s announcement is a promising start to solving the student debt crisis.

But, he says, that overlooks borrowers whose ability to buy a home or start a family is hampered by student loans — even if they earn relatively large paychecks.

“It’s missing the low-wealth people who now have high incomes,” Perry said. “There are a lot of people who started out poor and now they’re middle class. But they’re still in debt.”

Why it’s often harder for black borrowers to repay their student loans

Perry says the annual salary is a misleading way to gauge how easily someone can repay a student loan. Instead, it focuses on overall wealth.

That’s largely because family money can often be the difference between choosing a fixed-rate loan repayment plan and a gradual repayment plan when you’re fresh out of college.

Take income-tested plans, for example. Lower monthly payments are easier to afford on entry salaries, but ultimately result in much higher total costs due to the high interest borrowers accrue in those early years. People on income-tested plans can spend years accumulating interest faster than they can pay it back, even if they make their minimum payments each month.

In a fixed rate plan, you pay the same monthly minimum throughout your repayment. You’ll pay a lower total amount, but it’s harder to pay those monthly payments on an entry-level salary unless you have some generational wealth.

The 2019 Federal Reserve Board Survey of Consumer Finances found that the median wealth of white households nationwide was $188,200, nearly eight times higher than that of black households. A Brookings Institution analysis of data from this survey found that 30% of white households could give their children an inheritance of $195,000, while only 10% of black households could afford $100,000 – a much higher figure. little.

“People from low-income households are being told that going to college is the primary route to getting a piece of the American Dream,” Perry said. “White people definitely have … more wealth. They have their own higher education plans to make college more affordable.”

Loan debt has global economic consequences

Bre Jefferson, a graduate student at Georgetown University, said she owed $47,000 with interest from studying at Western Washington University to get her bachelor’s degree. Her master’s degree in public policy is covered by a merit-based scholarship, but Jefferson says having debt — even after a $10,000 forgiveness — affects how she plans for her future.

“I used to work in jobs where I didn’t make six figures, but those were jobs that nurtured who I am as a person and how I want to contribute to society,” said Jefferson, 31. year. “I have to decide if I want to pursue financial success or work in a job that matches my intrinsic values.”

Both Jefferson and Washington say they are concerned about their ability to buy homes, raise families and invest for the long term. And because their loan payments have been deferred since 2020, they don’t know exactly what they will do when payments resume on January 1, 2023.

For now, Washington says his savings are going to furnish his apartment and a family trip in December. Jefferson says she’s trying to decide between paying off her loans as quickly as possible or only making her minimum monthly payments so she can put more money aside for retirement.

The two women’s concerns show exactly why high debt can have global economic consequences, says Perry: “When you have more debt, you have less discretionary money to invest in essentials, like housing and energy. You also can’t invest as much, so you see fewer homeowners and fewer business owners.”

The student loan debt that black borrowers are racking up could even shrink — or eliminate — the black middle class, perpetuating a cycle of stagnating or depleting wealth and leaving people with less ability to finance higher education than their children.

Researchers define America’s middle class by wealth and education, but highly educated black households typically hold far less wealth than their white counterparts, says Fenaba R. Addo, co-author of the forthcoming book “A Dream Defaulted: The Student Loan Crisis Among Black Borrowers.”

“We started by building on the literature that says black people with higher education constitute the middle class,” said Addo, an associate professor of public policy at the University of North Carolina at Chapel Hill. “But looking at their portfolios of wealth, it didn’t reflect the American middle class as a whole.”

More debt cancellation could help – at a cost

The Biden administration’s announcement is a great first step, Perry said: Lowering monthly payment caps from 10% of a borrower’s income to 5% could make a significant difference.

The same goes for the plan’s additional $10,000 in student loan debt forgiveness for Pell Grant recipients. In the 2015-2016 school year, 72% of black students received Pell grants, compared to 34% of white students, according to the National Center for Education Statistics.

Still, the total forgiveness amount isn’t enough specifically for black borrowers, Perry says. In his ideal world, he adds, the United States would find a way to offer free college — not unlike the country’s K-12 public school system.

“If we’re committing to the American dream, we should have a public option for people to go to college that’s similar to the public option we have for K-12 schools,” he says. “Retroactively, we should be canceling more student debt. And ideally, this cancellation model would be more wealth-based, not just income.”

Other experts warn against adding to the current amount of the rebate, which is already expected to cost the federal government $329.1 billion over 10 years, according to a budget model from the Wharton School at the University of Pennsylvania.

Based on that data, Andrew Lautz, director of federal policy at the National Taxpayers Union, estimated that it would cost the average taxpayer more than $2,000. “It has consequences for consumers,” Lautz told CNBC last week. “That has consequences for taxpayers.”

But putting funds back into the bank accounts of black borrowers will allow them to reinvest more fully in the economy, Perry says.

“People believe education predicts wealth, when in fact wealth predicts education,” he says. “We’re still dealing with the symptoms of discrimination instead of the root causes, and at some point we’ll have to eliminate it on a structural level for black borrowers to even start building wealth.”

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