Are Student Loans Contributing to Racial Wealth Gaps?

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Wealth gaps between black and white families have been well documented. A recent issue of In the Balance explored how these existing gaps may manifest themselves in higher education financing.

In the analysis, Fenaba Addo, a visiting scholar with the St. Louis Fed’s Center for Household Financial Stability, explained that family income primarily determines financial aid decisions and that family wealth plays an important role in discharging student debt.

“Therefore, existing racial wealth disparities and soaring higher education costs may actually replicate racial wealth disparities across generations by driving racial disparities in student loan debt load and repayment,” she noted.

Ability to Pay for College

Addo noted that the average net wealth of college-educated blacks is about one-tenth that of whites. Thus, white families are in a better position to pay for college.

Indeed, the author cited a youth survey showing that 58 percent of black young adults received an average of $4,200 from their parents, compared with an average of $12,000 given by 72 percent of white families. The same survey reported that college-educated white young adults had about $17,000 more wealth than black young adults who attended college.Data are from the 1997 cohort of the National Longitudinal Survey of Youth.

Addo calculated that a $10,000 increase in young adult net wealth is associated with 7.6 percent less student loan debt. “Young adults with high net wealth may have benefited from transfers of wealth from their parents and subsequently may be in a better position to pay down their student loans quicker,” Addo wrote.

Conclusion

Addo concluded that the current generation of young adults may not be able to automatically assume the same social class standing as their parents. She noted that this was especially true for black young adults coming from middle-class and higher net wealth households.

“They, like their parents’ and grandparents’ generations, might find their pathway to middle-class status, financial security, and stability to be a tenuous one,” Addo wrote. “If student loan debt is more burdensome and consequential for black young adults, one of the unintended consequences of rising college costs may be that the long unstable and fragile position of the black middle class will persist.”

Notes and References

¹ Data are from the 1997 cohort of the National Longitudinal Survey of Youth.

Additional Resources

• On the Economy: The College Boost: Grads Still Do Better Than Nongrads Financially
• Timely Topics: Women in Economics: Fenaba Addo