Study: Student Loan Debt Hinders Wealth Accumulation For Black, Hispanic Borrowers

August 06, 2018
 
College students in caps and gowns for graduation ceremony.

College students in caps and gowns for graduation ceremony.

Wikimedia Commons

A new study from the University of Illinois finds that student loan debt disproportionately affects the financial well-being of black and Hispanic borrowers later in life.

Outstanding student loans negatively impact wealth accumulation for all borrowers — regardless of their race — but the impact is especially significant for black and Hispanic loan recipients, said the study’s co-author, Min Zhan, a professor of social work at the University of Illinois Urbana-Champaign.

Compared to those without outstanding debts, black and Hispanic borrowers had $36,000 less in net worth than their peers by age 30, according to Zhan. They also had significantly less in investments and nonfinancial assets, like homes and businesses.

The study included data collected between 1997 and 2012 as part of the National Longitudinal Survey of Youth. Zhan co-authored a study in 2016 that examined the impact of student loan debt on wealth accumulation across races. She said she discovered through her research that the impact was especially dire for black and Hispanic borrowers as compared to whites.

The rapid growth of student loan debt among households headed by minority young adults and the difficulty they have repaying those loans — in addition to the widening wealth gap among ethnicity groups — motivated her to look more deeply into the issue, Zhan said. 

Outstanding student loan debt is exacerbating income inequality among different racial groups, she added. 

The cost burden of college tuition has also shifted more toward the student and their family in recent decades, versus assistance from the state or federal government, Zhan said. She said she frequently hears from students about how their loans have prevented them from starting their careers or buying homes.

“Basically they cannot move on, they can only hang there because of this big burden of student loan,” Zhan said.

Still, she said, a college degree correlates strongly with higher earnings later in life — but those gains may be offset by the loans required to pay for rising tuition costs.

“The take-away point from this study is addressing the unmet financial needs of low income students with additional loans or other credit could be counter-productive,” Zhan said. “We should have alternate sources to help them finance their college.”

For example, she said, subsidies like federal Pell Grants could be expanded with more investment. More state and federal grants for low-income students would decrease the amount they’d need to borrow, Zhan said.

Additionally she said, more financial education could help families understand the need to save for college. Many students who take out loans to pay for school also don’t possess the knowledge and skills necessary to make informed financial decisions, Zhan said.

“Increasing financial literacy is very critical,” she said.

Follow Lee Gaines on Twitter: @LeeVGaines

Story source: WILL