Black students are disproportionately affected by the U.S. student debt crisis in large part due to systemic racial and wealth inequality, experts say. Not only do Black students have the highest amount of debt, but they also tend to have the highest on average interest rates: 5.5% vs 4.9% for white students.
On average, Black students carry the highest amount of student debt at $29,826, according to research done by Bold.org, a San Francisco-based scholarship organization. According to Bold.org, that is over $4000 more than the average student debt of $25,587. Because Bold.org helps students get outside scholarships, many of the students in this study did receive additional scholarships to limit the amount of loans they took out.
There isn’t an exact reason why students of color, specifically Black students, face higher student debt as a result of higher loans. Many Black students attend historically Black colleges and universities (HBCUs), which tend to be private, and therefore more expensive. However, it is more likely they have on average a higher interest rate due to lenders considering them “a higher credit risk.” This could be attributed in part to geography, a form of academic redlining and historical systemic oppression.
"When they're asking those demographic questions, you know, that's certainly triggering,” said Danielle Burns, a Black vice president with CNote and accredited investment fiduciary from Carmel, Ind. “A lot of it is based on the zip code that you live in... so a lot of Black and Hispanic applicants are putting their zip code in, and it's easy, very easy to do a data search and say ‘This zip code is a low- to moderate-income community.’” Using that knowledge, lenders then assume that residents in those communities, and in these cases, the applicant, are at higher credit risks.
However, there are options available to mitigate this financial inequality on an individual level.
What does the research say?
According to Bold.org CEO and Co-founder Dror Liebenthal, a study was done by analyzing survey data from over 240,000 Bold.org users. The survey asked:
- How much was initially taken out?
- How much is remaining on the loan?
- What is the interest rate?
- Who was the lender on the loan?
Bold.org offers a tool on its website to examine how much in loans a student would need to take out, but also the amount he or she would need to pay back, and how long that would take. With the data from Howard University, an HBCU, the average loan a student would need is about $9,660. With a low estimated interest rate of 3.9%, that means the student would need to pay back up to $15,055. With a minimum $50 monthly payment, that would take the student 300 months to pay back, or 25 years and two months.
However, if the student could increase the monthly payment by just one dollar more, it cuts off a year of loan repayments and brings the total repayment down to about $14,850. If the student raised the minimum payment by $10 to $60 a month, the loan would only take 18 years and 11 months to repay, cutting out six years of repayment. Because of the interest, that would make the total repayment amount about $13,590. Paying back even a small portion above the minimum required could help mitigate the amount of debt.
Why do the rates differ?
According to Frank Paré, a Black Certified Financial Planner from Oakland, Cali., Black students may also face higher debt on average because generally there isn’t as much generational wealth in their families.
“There isn't as much wealth in the African-American community to help offset some of that expense,” Paré said. “It can be in the form of maybe the parents or the grandparents had a home that allowed for the parents to, buy or lease, inherit assets that allowed them to save more for their kids heading off to college or, maybe there was some sort of resources set aside for the kid that perhaps the typical African-American family didn't have.”
With statistically less familial financial support for college, that would lead to more Black students needing to pay their own way through, and with rising college prices, that can be difficult to do.
According to a College Board study, the average price of a semester of college at a public four-year university in the 2020-2021 school year was $10,560. In the 1973-1974 school year, it only cost $2,710, and that is adjusted for inflation. In 1973, the federal minimum wage was $1.60 an hour, which when adjusted for inflation is the same as $9.84 in today’s dollar. But the federal minimum wage in 2021 is still only $7.25. The average starting salary of a college graduate in 2019 was $53,889 according to the National Association of Colleges and Employers.
What can be done?
So what are ways Black students can minimize the amount of student loans they take out and need to pay back?
Lee Baker, a certified financial planner with Apex Financial in Atlanta, explains that this process starts early. Parents might want to start having conversations with their children as early as middle school to start figuring out their post-high-school plans.
- Does the student want to take AP or IB classes to get extra credits which could help the student graduate early?
- Does the student want to use a dual enrollment program to graduate high school with an Associate’s Degree already?
- Does the child want to spend the first two years of college at a community college, and then transfer to a four-year university for the final two years to save money?
It is important to start the process early and thoroughly research the available options, so parents don’t find they have disappointed their children and minimized their opportunities. But parents aren’t the only ones who need to do their research, the student should as well, according to Burns.
“I would just encourage them to do their research, don't take, you know, take it at face value... find out what's the average student loan rate,” Burns said. Asking questions can help students find the best rates for them. If students know what the base interest rate is on a student loan, they can ask why they are not being offered the same deal, and what steps they could take for a lender to give them a similar rate, Burns said.
Students could look at Community Development Financial Institutions (CDFIs) in their area which will be more likely to provide fair loans without looking at the credit score of the family. Because the mission statement of most CDFIs is to minimize the wealth gap, they are more likely to be useful to BIPOC students in ways that won’t stack them with higher debt, according to Burns.
It’s important to note that students shouldn’t just accept their first private loan offer. For each private loan they apply for or look into, the student should examine the interest rates to limit the amount of interest applied, said Baker.
“Unfortunately, we live in a world where as it relates to other debts, certain segments of our population don't get offered the best deals,” Baker said. “You see that the deals that get offered aren't the same, and, you know, perhaps it shouldn't be. But it means we've got to do more shopping around to make sure we are getting adequate offerings.”
For some students, it might be better to avoid private loans altogether. Private student loans aren’t as regulated as federal loans and they can change interest rates or sell the loan to another lender. For more security, it is generally better to stick to federal loans.
Looking at loans as an investment
Student loans are a long-term commitment and an important investment. In the current state of the world, people with student debt will likely be carrying it for at least 20 years.
“Think about it as a 20-year mortgage or a 30-year mortgage. If you extend it, I mean there's a lot of things you can do with student loans,” said Stoy Hall, a Black certified financial planner with Black Mammoth in West Des Moines, Iowa.
Skipping out on student loan payments is always a bad idea, but some financial advisors differ on whether or not someone should put in the extra effort to pay them off early.
According to Hall, as an investment, a person has already gotten everything out of their student loans by getting a degree. Would the extra money be better spent investing somewhere to make more money, instead of just paying off this one debt? What will be the best growth opportunity for them and their money?
But advisors like Baker think paying off loans faster is always a better plan, so it isn’t hanging over your head. This is especially important because student loans are one of the largest factors in minimizing millennials, and Black millennials' net worth. According to The Wall Street Journal, Black college graduate millennials have a net worth of only $8,200.
“The sooner you can get out of that debt, get that burden off your back, the better,” Baker said.
So where do we go from here?
As the student-loan crisis has grown, there has been an increased push to forgive them entirely, especially as a method of closing the wealth gap.
During the pandemic, due to extra funding through the CARES Act, multiple HBCUs forgave hundreds of thousands of dollars of private student loans.
Those graduates who had their debt forgiven are more likely to start their post-collegiate life in a more financially secure position. With some of their debt gone, they can refinance the remainder of their student loans, and possibly get a lower interest rate, according to Baker. Graduates students who refinance their loans could potentially save thousands of dollars. If the student has a good credit score and stable job with steady income, the refinancing is more likely to be more successful.
During the pandemic, there has also been a federal student loan payment freeze, meaning those who have federal student loans didn’t need to make payments and the loan wouldn’t generate interest during the timeframe. Recently, President Biden extended the freeze through Jan. 31, 2022.
While nothing is guaranteed, federal student-loan forgiveness has become a hot-button political issue. Some politicians, like Sen. Elizabeth Warren (D-MA), have campaigned heavily in favor of it. Since taking office, Biden has forgiven over $9.5 billion in student debt through existing loan forgiveness channels, and other senators, including Senate Majority Leader Chuck Schumer (D-NY), are pushing for more.
Yet if the student loan crisis continues to grow and the racial inequities are not addressed, the problem won’t be solved without a major change to the United States higher education system.
“I think that we're certainly in an environment now where folks are, you know, they're doing more research, they're understanding the landscape of what student loan lending looks like,” Burns said.