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 of Senator Warren (D-Mass.), and broad public support For Cancellation Advocates are still pushing for cancellation to solve the current $1.75 trillion 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. Focus only on “successful” student borrowers – arguing that much of the debt is held by high earners or college graduates “have a tendency to to earn Following” over a lifetime – captures only 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 Fellow 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 the median student debt of borrowing black households has increased by nearly 100% in just six years. Within the bud racial wealth difference literature, some research has shown that debt can aggravate racial inequalities through disparate structures, terms, and/or returns. “Black debt” and “white debt”. 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 comes from of construction factors: lower wages, lower return to education, and a lower probability of obtaining a diploma. Our current system tells Black and Latino borrowers to leverage debt to compensate for their own discrimination in the job market…credits for which they must pay more, both initially and over time.

These factors produce a racial indebtedness gap that extends over decades, affecting the life course in ways far less often experienced by non-Latin whites (see, for example, the crucial research of Addo Fenaba and Jason Houle). After twenty years of repayment, the median black borrower still due 95% of the original amount they had 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, it was true for half of borrowers. A 2021 data request by Senator Warren revealed that 4.4 million borrowers have 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 experiencing the biggest increase student loan 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 this Marc Huelsman of the Higher Education Policy Project aptly described 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 to research found that in 2018, 62% of borrowers under 35 in minority-majority neighborhoods had growing balances. Borrowers with rising balances are often stigmatized for not making ‘progress’ in paying off the debt balance, one story highlighting “individual responsibilitydespite the 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 the extremely low number (statistically nil) of loans canceled by IDR, and high attrition rate at the start of the program, raise doubts that IDR forgiveness will ever happen for the most part, absent major changes. And yet, a 100% persistence and forgiveness rate for IDR enrollees is assumed in model calculation 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 draw its due: tax and social contributions, Payday entry, through civil suits.

Without a doubt, canceling a student loan is a matter of racial and economic justice. But when people in privileged positions, whether 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 low-income borrowers.

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.