Regressive student loan system leads to costly racial disparities

With Senate and House resolutions to cancel up to $50,000 in federal student debt for borrowers, following a proposal by Sen. Warren (D-Mass.) student debt crisis. But some lingering stories have tried to thwart the promise of student loan forgiveness. One strain of thinking alleges that cancellation would be meant to be “regressive,” that most student loans are held by wealthy people, and that cancellation would benefit those who need it the least the most.

But this argument ignores who exactly is borrowing and what constitutes an excessive student debt burden. We argue that it is not the cancellation of student loans that is regressive, but the system of student loans himself. Focusing only on “successful” student borrowers – arguing that much of the debt is held by high earners, or that college graduates “tend to earn more” over their lifetime – only captures half of a system with divergent results. By focusing on the regressive design of student loans, we can understand how they disproportionately burden those least able to pay, while providing lesser rewards.

With co-author Raphaël Charron-Chénier, Brookings scholar Louise Seamster showed that black households are more likely to hold student debt at most income levels. In another study, a team including Seamster found that the median student debt of black borrowing households increased by almost 100% in just six years. In the burgeoning literature on the racial wealth gap, some research has shown that debt can deepen racial inequality due to disparate structures, terms, and/or returns to “black debt” and “black debt.” White “. Black and white borrowers tend to experience debt very differently, particularly because it’s structured in a regressive way. Not only do black borrowers have to borrow more to compensate for racial differences in wealth, but they have to further their education to earn equivalent returns – an issue of increased “certification”. Previous research indicates that black borrowers’ greatest difficulty in repaying stems from structural factors: lower wages, lower returns to education, and a lower likelihood of obtaining a degree. Our current system tells Black and Latino borrowers to leverage debt to compensate for their own discrimination in the job market — credentials they have to pay more for, both initially and over time.

These factors produce a racial indebtedness gap that extends over decades, affecting the life course in a way far less often experienced by non-Latino whites (see, for example, crucial research by Fenaba Addo and Jason Swell). Twenty years after repayment began, the median black borrower still owed 95% of the original amount borrowed, while the median white borrower had almost fully repaid their loan. While this shocking statistic illustrates how student debt can deepen racial inequality, we view it as a measure of the regressivity of student debt.

Many borrowers in financial difficulty will likely end up paying Following than wealthier borrowers for the full term of their loan, not less. Student loans “cost” less to borrowers who are able to repay them faster, thanks to family resources, higher incomes and private refinancing. Collectively, the better off borrowers can go through this system as originally intended. But the worst-off borrowers remain trapped there for decades. In 2009, approximately 18% of borrowers had been in repayment for more than seven years. Ten years later, this was the case for half of the borrowers. A 2021 data request from Senator Warren found that 4.4 million borrowers had been in repayment for more than two decades. This finding also overlaps with the growing number of borrowers over the age of 60, the age group that has seen the largest increase in student debt over the past decade.

How did so many people end up student borrowers for life? Millions of borrowers are in too much financial distress to repay their debt. But many other borrowers making regular payments are struggling to make a dent in their loan balance. We don’t know how much because we lack information on student loan cash flow. Without it, it’s hard to calculate how many people have static or rising balances despite regular payments.

But many borrowers are caught in what Mark Huelsman of the Higher Education Policy Project aptly describes as a “debt trap.” Basically, once borrowers experience growing balances due to unpaid interest (“negative amortization”), it is difficult to get out of their original position. For example, the Washington Post recently asked its readers what “they would change” about their student loan debt. Almost all contributors mentioned student loan interest as part of their payment difficulties. These accounts illustrate a growing body of evidence for the regressive role of interest. For example, research by Looney and Yannelis found that in 2012, 57% of borrowers two years after the start of repayment owed more than when they started (compared to just 9% of borrowers in 1986). And there is evidence that growing sales are also racialized. Recent research found that in 2018, 62% of borrowers under 35 in majority minority neighborhoods had growing balances. Borrowers with rising balances are often stigmatized for not making “progress” in paying down the debt balance, a discourse emphasizing “individual responsibility” despite systemic regressivity.

Many student loan “reforms” to date have prolonged the regressivity of the system by lengthening the loan repayment period. Various income-contingent repayment (IDR) programs, which reduce payments and extend the repayment period, have offered the promise of eventual loan forgiveness. However, early indicators of the extremely low (statistically zero) number of loans canceled through IDR and high attrition at the start of the program raise doubts that IDR cancellation will ever occur for the most part, in the absence of major changes. And yet, a 100% persistence and forgiveness rate for IDR enrollees is assumed in models calculating the supposedly more “progressive” aspects of over twenty years of IDR, compared to immediate cancellation. The success of the Paycheck Protection Program in the age of the pandemic has shown that the federal government can run loan programs that offer forgiveness whenever it wants. For student debt, only its regressive components appear to be working as promised – the components that extend the term of the loan and increase the total interest.

Finally, student loans are much harder to give up than other forms of debt. Changes to bankruptcy rules (initiated by then-Senator Joe Biden) made student debt nearly impossible to pay, with punitive and debilitating effects. Currently, a quarter of borrowers overall and half of black borrowers fail to repay their student loans within 12 years. But defaulting on student loans doesn’t mean loan cancellation — it continues the debt obligation, on tougher terms. And even in the absence of voluntary reimbursement, the State can still collect its due: deduction of taxes and social benefits, seizure of wages, through civil suits.

Without a doubt, student loan forgiveness is a matter of racial and economic justice. But when people in privileged positions, whether it’s Matthew Yglesias or Larry Summers, focus only on wealthy borrowers, they further erase how our regressive student loan system has disproportionately burdened Black, Latino and Latino borrowers. low income.

The Biden administration’s incremental reforms to date have not seriously addressed the regressivity of the system. Debt cancellation, on the other hand, has the potential to trigger a cascade of positive change and spur movements reshaping higher education funding. More importantly, it can help dismantle the increasingly regressive and racialized structure of the student loan system.