African Americans are defaulting on student loans at about double the rate of their white counterparts, underscoring how pernicious a problem consumer debt has become particularly for low-income households.
New data from the New York Federal Reserve indicates that the default rate for black students is now about 17.7%, compared with 9% for whites. The default rate for Hispanics is around 13%.
Central bank economists arrived at the conclusions by studying student loan activity according to ZIP codes, breaking them down by racial composition and using that information to determine debt loads.
Student loan debt in total stands at $1.5 trillion, up $20 billion in the third quarter, with 10.9% borrowers in default, or 90 or more days past due for the 43 million Americans impacted. (The actual default rate including deferment, forbearance and other delayed stages is about double that.)
The racial breakdown shows that a "disproportionate" number of minority borrowers are "falling behind the repayment requirements, even in a historically strong labor market. The large dispersion in borrowing and repayment experiences by race warrants further research into the roles played by differences in educational institutions attended, majors chosen, and in parental financial support," said the report, authored by economists Andrew F. Haughwout, Donghoon Lee, Joelle Scally and Wilbert van der Klaauw.
Loan balances in aggregate had been close to the same among African Americans and whites but skewed apart in 2010 around the time the federal government began offering direct loans.
There are considerable differences in debt to income among racial groups. Average indebtedness for blacks is now more than $37,000, almost as high as the $38,000 average income for families in the ZIP codes that have high concentrations of black families. Hispanic indebtedness averages $29,000.
"The repayment struggles suggested by relatively higher default rates in majority-black and majority-Hispanic areas point to the likely importance of income differences across borrowers from different areas," the report said.
Researchers and policymakers have been looking for solutions. Democratic presidential candidates have offered a variety of fixes, ranging from full forgiveness to debt caps.
More immediately, students can apply for programs where payments are calculated on income, rather than a set premium based solely on principal and duration of the loan.
"On the back end, it's incredibly important that we're removing barriers to enrollment to income-driven payment plans," said Sarah Sattelmeyer, manager of the Pew Charitable Trust project on student borrower success.
One of the barriers is simple awareness.
Some students don't know how to get into the plans, and others sometimes don't remember to reenroll every year.
Sattelmeyer said sharing of data from the IRS to appropriate federal agencies can help overcome the latter issue. She said Pew also is backing efforts to find borrowers in danger of falling behind before it happens, as well as getting access to more encompassing data about delinquencies, including racial breakdowns, which are not readily available due to regulations.
The economic damage from excessive student debt is just beginning to manifest itself.
Moody's Investors Service recently estimated that wiping out student debt would have a "tax-cut-like" benefit but also pose a moral hazard and perhaps even cause the problem to get worse.
However, should defaults escalate, regulators and legislators could find their hands forced into aggressive measures.
"Issues like this impact family balance sheets and what they talk about at the kitchen table," Sattelmeyer said. "This is incredibly important and on the minds of consumers and voters."