Student loan forgiveness is the overlooked remedy that could help close the racial wealth gap

May 10, 2022, 3:50 PM UTC

Joe Biden has canceled more student loan debt than any other U.S. president, forgiving $16 billion in federal student loans for targeted groups such as disabled borrowers, and students who were defrauded by their institutions. Since April, Biden has been deliberating widespread student loan forgiveness and has also been considering income caps that would exclude high earners from student loan relief. As the nation waits to hear what executive action may be taken against the crippling $1.75 trillion in total U.S. student loan debt, college students from communities of color are on the edge of their seats. 

Data shows that 33% of Hispanic student borrowers have put off getting married due to their student loan debt, and 46% of Black student borrowers have postponed buying a home for the same reason, according to the Education Data Initiative. For indebted students of color, educational debt forgiveness is about more than just legislation; it’s key to reclaiming autonomy in their own lives and crafting different legacies for their children. 

“Removing the burden of student loan debt would allow borrowers of color to begin building their savings at an earlier age,” Bobby Matson, the CEO of Payitoff, a fintech company whose software enables banks to offer their customers student loan refinancing, told Fortune. “Starting to save earlier compounds the wealth they would be able to amass over their lifetimes, which, in turn, should assist them in being able to contribute to their children’s educations, reducing dependency on student loans.”

The myths and realities about educational debt in America

As of 2019, it was widely believed that student debt was mostly held by Americans with higher-than-average incomes, and the poorest 20% of Americans, as measured by income, held just 8% of the total share of student debt, according to the People’s Policy Project. And in 2020, households with incomes above $74,000 reportedly owed almost 60% of the outstanding education debt, citing Brookings. As a result, it was concluded that blanket student loan cancellations would primarily benefit the wealthiest households in the country. 

“Truly wealthy families do not borrow for college at all and do not hold student loans,” Kat Welbeck, director of advocacy and civil rights counsel at the Student Borrower Protection Center, told Fortune. “And when they do, they pay off debt much more quickly. The way we measure ‘progressivity’ with nearly every other social program is how benefits compare to a share of income. Student debt-to-income ratios are much higher for the poorest households, and therefore the benefit of student debt cancellation will be felt most by low-income and middle-class borrowers.”

New research from the Roosevelt Institute echoes Welbeck’s sentiments. Blanket student loan cancellations would disproportionately direct aid to lower-income individuals, per the study

When evaluating which households would benefit most from student loan forgiveness, previous studies have looked at total student loan debt—combined federal and private loans—as synonymous with debt that would be canceled. However, private loans are usually held by higher-income and higher-asset borrowers, and only federal loans would be eligible for forgiveness under Biden’s proposed policy, per the study. When looking solely at federal loan balances, the Roosevelt Institute found that they are greatest in the middle (60th to 70th percentile) of the household income distribution, meaning that student debt cancellation would positively affect low- and middle-income households in particular. 

Which racial demographics would benefit the most from student loan forgiveness?

“Racism in the labor market, housing market, and debt collection has created a perfect storm by which higher education is simply more expensive for Black households,” Welbeck told Fortune. “The average Black student loan borrower takes on nearly 50% more debt for a bachelor’s degree than his or her white peers.” 

Almost half of Black students—49%—are likely to borrow federal education loans, as opposed to 29% of Hispanic or Latino students and 21% of Asian students, according to the Education Data Initiative. Black student loan borrowers are more likely to struggle financially because of their debt and 66% of Black borrowers report they regret having taken out student loans to fund their education, also per the Education Data Initiative. In addition, 74% of Black voters, in a February poll from the Student Borrower Protection Center and Data for Progress, support the federal government canceling some to all student debt.

“President Biden promised to address the student loan crisis, and in my opinion forgiving student loans in the amount of at least $50,000 per borrower is the only way to genuinely address equity,” Ivory Toldson, Howard University professor and Director of Education Innovation and Research for the NAACP, told Fortune. “According to Brookings the average white family has roughly 10 times the wealth as the average Black family. Reducing student loan debt for Black borrowers could help them begin their lives after graduation without the burden of debt.”

Toldson believes that the suffocating financial obligation of student loan debt is the nucleus of many issues in Black households such as career options and even marital stability. 

“It affects their ability to buy a house, which is key to joining the middle class,” Toldson told Fortune. “It can also affect where someone chooses to live and work. It can even impact marriage choices and marriage survival since financial difficulties are a leading cause of divorce.”

Black women in particular would get relief from education debt forgiveness

“Communities of color—particularly women in those communities—would benefit the most from student loan forgiveness,” Matson told Fortune. “People of color can obtain the same degrees as their white counterparts, apply for the same jobs, and still wind up considerably less wealthy in the long run. Black and Hispanic individuals generally have less financial support from their families in paying for college, and hence they start out their careers with greater debt than their white counterparts. After college, data shows they simply don’t earn the same income as white individuals of equal merit.”

Matson believes that women of color experience a “double whammy,”  because they are both the most educated and indebted college demographic in our country. Women of color owe 22% more student loan debt than white women and are paid 64 cents to every dollar compared to white men, citing the executive. 

Welbeck seconds the opinion and adds that due to a range of factors like wage discrimination and servicing failures, Black women are more likely to face struggles in repayment such as growing balances, delinquency, and default. In her opinion, forgiving student loans is integral for fixing racial wealth disparities in America.

“An extensive body of research shows that rising levels of student debt disproportionately affect Black people and Latino/a people—in particular, Black women,” Welbeck told Fortune. “This inequity widens the racial wealth gaps caused by centuries of systemic racism. Student debt cancellation is an essential tool that must be used to help close the racial wealth gap.” 

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.

Read More

InflationReal EstateInvestingCompensationCareersStudent Loans and Debt