Student debt disproportionately affects Black borrowers. Today, 86.6% of Black college students take out federal loans to attend four-year colleges, compared to just 59.9% of white students.
Many believe that student loan debt is beneficial, as it can potentially improve your credit score and demonstrate creditworthiness if payments are consistent. However, a large number of Black borrowers aren't reaping these benefits, and the ongoing pandemic has only worsened this crisis. For many Black borrowers, student loans are not considered to be "good debt," according to a study titled Jim Crow Debt by The Education Trust's Senior Research Associate Jonathan Davis, PhD and Jalil Bishop, PhD.
The study, based on nearly 1,300 Black borrowers, highlights the parallels between student debt and the racial wealth gap. More than half of Black borrowers in the study disagree that student loans contribute to racial equality (58%) or help them to build wealth (61%). Sixty-six percent regret taking out education loans that now seem unaffordable.
The desire for high paying jobs and financial freedom puts Black students in a bind, as their need for affordable access to higher education leads them to attend colleges with "less resources and lower endowments," and take out more loans than someone at a better-funded institution, according to Dr. Bishop.
And after graduation, Black borrowers are "navigating labor markets, where they're increasingly facing discrimination that then requires them to have to return back to higher education because they believe a graduate degree will help them be a buffer against some of that labor market discrimination," he tells CNBC Make It. According to the Economic Policy Institute, even Black workers with an advanced degree experience a significant wage gap compared with their white counterparts, with Black workers being paid 14.9% less than white workers.
Student loans themselves are not the only problem, the way they're paid back is, too. Income driven repayment plans have not only contributed to the hindrance of economic success for Black borrowers, but 67% of borrowers say they have negatively impacted their overall mental health.
IDR plans are designed to work as follows: If enrolled, borrowers have their student loan payments adjusted based on their discretionary income, and the standard 10-year repayment period is extended over 20 to 25 years – at which point, borrowers may apply to have their outstanding student loan balance cancelled. Of the Black borrowers in the study who were in repayment, 72% were enrolled in IDRs and felt like they "re-enroll in IDR every year with no hope of paying off their balance." Victoria Jackson, assistant director of higher education policy at the Education Trust, asks "are they really effective?"
"The U.S. Department of Education released data on borrowers who should have become eligible for cancellation under IDR for 2019 and of the 2 million borrowers who should have been eligible, only 32 borrowers got cancellation," Jackson says. "It's really a broken program … There needs to be some serious structural changes that move people to cancellation."
Increasing balances under income-driven repayment plans can be a terrifying reminder of the seemingly endless payments to come for Black borrowers. Some participants in the Jim Crow Debt study compared these plans to "shackles on their ankle," alluding to the idea that they will never have full freedom.
"We all know that there's a long pattern of debt being used as a tool of racial control, regardless of intent," says Dr. Bishop. "Jim Crow, slavery, sharecropping, this is how borrowers describe the debt themselves. And so we emphasize that junk debt (debt that does not have an investment grade credit rating) is not hyperbolic, but it's meant to show a pattern of how debt has been used as a tool to limit black people's opportunity."
When it comes to plans for the future, the majority of Black borrowers hope for student debt cancellation. In fact, 80% of borrowers surveyed support government forgiveness of all student debt. Jackson believes Congress should stop "dragging their feet" and take action — before the federal student loan deferment period ends on January 31, 2022.
"When we think about this looming payment deadline that's gonna happen starting in February of next year, it's really time for Congress or for the executive branch to act and to cancel student debt."