Student Loan Forgiveness May Narrow the Wealth Gap for Black Families, Disappointing Critics

As borrowers begin to apply for student loan forgiveness, some conservative groups are saying relief would affect the racial wealth gap—and that's a problem.

Frustrated student sits in front of laptop.

Canceling Student Loans Is Just A Start

Borrowers are applying for student loan relief now that the official application is available.

When President Biden announced his administration would forgive $10,000 for borrowers making less than $125,000 annually, he effectively eliminated the student loans of 32% of all borrowers.

He also announced $20,000 in relief for those who received federal Pell grants, which are earmarked for low-income scholars, and extended the pause on student loan repayments until Dec. 31, 2022.

According to the Federal Reserve, the total student debt is estimated to be $1.75 trillion. Black students have to rely more on loans, and the average Black borrower still owes 95% of their balance 20 years later, according to the NAACP. While many borrowers are celebrating having their student loan debt forgiven, systemic inequality for Black borrowers still exists.

Systemic inequality in the current student loan system affects Black families for generations, widens the wage and wealth gap, and hurts our ability to create a better future for our families.

Options Are Limited for Black Borrowers

"Black families have 10% of the wealth of white families, and so we start from a disadvantaged place when it comes to funding college," says Natalie Bullen, a financial advisor and CEO of Unapologetic Wealth Management.

"In working with clients, I've seen that white families are more able to use the tax code to their advantage with 529 and Coverdell Plans. Black families are much more likely to finance an education, so we start off in more debt and graduate with more debt than our white peers," says Bullen.

Bullen, herself, is a Black borrower with $96,000 in student loans, most of which is interest. Bullen initially borrowed $38,000, but her loans accrued $468 a month in interest until the student loan pause. She has to pay $5,200 a year to stay even.

There's talk of irresponsibility on the part of Black borrowers and that borrowing is their choice. However, what's not discussed is that a student loan is the only type of loan a young person with no capital, no credit, and no propensity to repay can get qualified for.

According to a study from Mckinsey, a lack of financial inclusion for Black Americans exists at every level of the traditional financial system in America. Black borrowers can only go so far on public loans and rely on private loans to fund their college education. There's also still rhetoric that students won't get good-paying jobs if they don't attend college.

Student Loan Debt Deepens the Wealth Gap

Debt relief is good news for Black borrowers, who are both disproportionately burdened by student loan debt and face the kind of systemic inequality that puts them behind the eight ball before they even begin college. Given that, it's a surprise the issue of student loan relief would've received criticism at all, But it has.

Conservative interest groups across the country have said the Biden administration’s student loan forgiveness plan violates the constitution. Wisconsin Institute for Law & Liberty (WILL) filed a lawsuit saying that the White House has an "improper racial motive" for relief.

The group says that eliminating student loan debt would narrow the wealth gap, benefitting Black borrowers in ways it claims are unfair. “The White House has indicated that one reason to do this is that they believe it would disproportionately benefit certain racial groups,” The Washington Post reports Rick Esenberg, president and general counsel of the Wisconsin Institute for Law and Liberty, said. “The racial motivation supports these taxpayers standing to challenge [the policy] and informs yet another constitutional difficulty with the program.”

They say this violates equal protection under the law as expressed in the constitution, even though the application asks no race-related questions. Of course, the racial wealth gap is a direct result of hundreds of years of enslavement and multi-century discrimination that robbed the enslaved and their descendants of income. Student loan forgiveness will help. But it's not enough to erase this legacy.

Wage Inequality Affects Loan Repayment for Black Borrowers 

Nearly 58 years after the passage of the Civil Rights Act, there is still inequality in what Black Americans can expect to earn, thus affecting their ability to repay student loans.

"We're more likely to default on our student loans because we get paid less," says Bullen. "When we graduate, we're getting paid less money, which means we have less capacity to repay those loans, and then the ones making payments are getting harmed by the tax code."

The U.S. tax code states that you can only write off $2,500 worth of student loan interest annually. A Black borrower is likelier to have a higher interest rate because they may have taken out private loans. This means Black borrowers end up paying more than $2,500 in interest a year.

"It's very confusing for the average borrower," says Joe Bautista, a certified financial planner who works with families trying to manage student loan debt.

"Borrowers don't know all their options. With private loans, there's not a lot of protection. With Federal loans, you can have income-based repayment plans, and there are some ways to lower the payments based on how you could lower your income through certain deductions. The average borrower doesn't know what to do."

With wage inequality, fewer loans available to Black borrowers in our financial system, confusion around options, and the existing tax code, it becomes clear how systemic inequality affects Black borrowers and impacts Black families.

Canceling Student Loan Debt Is Just a Start

Student loan debt prevents millions of Black families from having the ability to buy houses, save for retirement, and start businesses, and creates tremendous stress. That burden is increased for Black borrowers because of the current systems.

The announcement from President Biden is welcome news but more needs to be done to address how systemic inequality affects Black borrowers.

Because of system inequality, Black students are more likely to enroll in either underfunded or outright predatory colleges that leave them with high debt, little chance of earning a degree, or both.

Until we can address the inequality in wages and financial institutions' lending options, Black Americans can't make the kind of money they need to save and pay for their children's college educations. That pattern then gets passed down from generation to generation, furthering systemic inequality.

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