Student Loans and the Racial Wealth Gap

Education narrows the gap, but student debt can widen it

Higher education has long been seen as a ticket to upward mobility in the U.S. In large measure, it still is, with college graduates earning nearly 75% more on average than peers whose education concluded with a high school diploma.

Unfortunately, that ticket has become increasingly expensive. The likelihood of graduating with debt from a public or private nonprofit college ranges from 39% to 73%, depending on the state. The average federal student loan debt is $37,667 and the total average balance can exceed $40,000 if you include private loans.

Student debt tends to weigh most heavily on members of racial and ethnic minority groups, who often have far fewer financial resources to draw on—a disparity known as the racial wealth gap.

Key Takeaways

  • There is a significant racial wealth gap between White Americans and Black and Latinx/Hispanic Americans.
  • Higher education that leads to higher-wage jobs can help narrow the gap.
  • Student loan debt can worsen the gap by causing students to drop out and delay homeownership.
  • Disparities in the types of degrees students earn can also widen the gap.
  • The White House paused payments for all government student loans and announced debt relief for certain student loan borrowers.

What Is the Racial Wealth Gap?

For decades, economists have noted a substantial disparity in net worth between White households and those of racial and ethnic minority groups in the U.S. This is known as the racial wealth gap.

For example, the Federal Reserve reports that White households in 2019 (the most recent data available) had a median net worth of $188,200, compared with $24,100 for Black households and $36,200 for Latinx/Hispanic households. The Other race/ethnicity category, which includes households identifying as Asian, Native American, Alaska Native, Native Hawaiian, Pacific Islander, or having more than one racial identification, reported a median net worth of $74,500.

One reason for the wealth gap is that there is also a racial wage gap. The same Federal Reserve study found that White households had a median income of $69,000, compared with $40,300 for Black households and $40,700 for Latinx/Hispanic households.

Net worth exhibits strong differentials across groups defined in terms of education, racial or ethnic background, urbanicity, and housing status. These differentials generally mirror those for income, but the wealth differences are larger.

The College Borrowing Gap

Perhaps not surprisingly, given those differences in wealth and income, Black students are significantly more likely to borrow for higher education than their White peers.

For example, the American Council on Education reported that 86.4% of Black bachelor’s degree recipients in the 2015-2016 school year (the most recent data available) borrowed to pay for college, compared with 70.3% of Whites. Black students also borrowed more: $34,010 on average, compared with $30,119 for Whites.

$136.3 billion

The size of the private student loan market in 2021, up from $92.6 billion in 2014.

By contrast, Latinx/Hispanic bachelor’s degree recipients were less likely to borrow (67.3%) and borrowed less money on average ($25,524) than either Black or White students. A number of theories explain why.

For example, a 2016 report from the Hispanic civil rights organization National Council of La Raza (now UnidosUS) noted that many Latinx/Hispanic students and their parents are unfamiliar with the financial aid system in the U.S., including the Free Application for Federal Student Aid (FAFSA). The FAFSA is the key to obtaining grants, loans, and other forms of assistance. Also, undocumented and Deferred Action for Childhood Arrivals (DACA) students are ineligible for federal student loans—but they are eligible for state or college financial aid and private scholarships.

However, according to a 2021 report from the Fed, Black and Latinx/Hispanic students who take out loans are more likely than White students to have difficulty repaying them. The report found that among borrowers under age 40, 23% of Black borrowers had fallen behind in their loan payments, compared with 20% of Hispanic borrowers and 6% of White borrowers.

“These patterns partly reflect differences in rates of degree completion, institution type, and wages for a given educational credential,” the Fed concluded.


Students attending for-profit colleges generally take on more debt than those enrolled at public or private not-for-profit colleges. They also tend to have worse job outcomes.

How Student Debt Can Widen the Wealth Gap

Three main education-related factors—graduation rates, type of school attended, and type of degree attained—contribute to the racial wealth gap. Here is a deeper look at each one and its impact.

Graduation Rates Matter

Black and Latinx/Hispanic students who start college are significantly less likely than their White counterparts to finish, according to a 2019 report from the National Center for Education Statistics. It found that 64% of White students at bachelor’s degree-granting institutions graduated within six years, compared with 54% of Latinx/Hispanic students and 40% of Black students. Asian American students had the highest graduation rates, at 74% after six years.

Unfortunately, students who can check the box for “some college” on their job applications—but who don’t have an actual degree—fare a little better in the labor market than their peers who stopped with a high school diploma.

According to 2020 data from the Bureau of Labor Statistics (BLS), workers ages 25 and older with some college had median weekly earnings of $877, compared with $781 for workers with only a high school diploma—a difference of about 9%. On the other hand, bachelor’s degree graduates had median weekly earnings of $1,305—about 65% more than those with just a high school diploma.

In other words, students who leave college without graduating often have little to show for it, except for student loan debt that could prove difficult—if not impossible—to repay. 

In 2020, the unemployment rate for workers with bachelor's degrees was 5.5% versus 9% for people whose highest level of education was a high school diploma.

Type of School Makes a Difference

Regardless of race, students who attend for-profit colleges are considerably more likely to fall behind on their loan payments. Looking at adults ages 18 to 39 who borrowed to pay for their education, the Federal Reserve found that 24% of those who attended private for-profit colleges were behind, compared with just 9% who attended public colleges and 7% who attended private not-for-profit colleges.

Compounding the problem, students who attend for-profit schools tend to borrow more money overall. A 2020 American Association of University Women study, for example, reported that women who went to four-year for-profit colleges borrowed $42,778 on average, compared with $29,611 for those at public colleges and $32,086 for those at private not-for-profit colleges.

What’s more, several studies have shown that many employers believe for-profit degrees are of less value than degrees from public or private not-for-profit schools. And a 2018 working paper from the National Bureau of Economic Research (NBER) reported that students from for-profit schools not only earned less on average but were also less likely to be employed at all.

Enrollment data shows that Black students are disproportionately likely to attend for-profit schools. As of fall 2020 (the most recent data available), Black students accounted for 28% of all undergraduates at for-profit 4-year institutions and 30% at for-profit 2-year institutions, while accounting for just 13% of undergraduates overall. Latinx/Hispanic students, who account for 22% of all undergraduate students, are similarly overrepresented at for-profit 2-year schools (27%).

Particularly troublesome are for-profit schools that mislead students with false promises while encouraging them to take out federal loans. In March 2021, the U.S. Department of Education announced it would make it easier for students in such cases to use federal “borrower defense to repayment” or “borrower defense” laws to seek to have their federal loan debt canceled. The department believed the change could help some 72,000 borrowers receive $1 billion in loan cancellation.

Some Degrees Pay Off More Than Others

Regardless of the type of school attended, Black students tend to be underrepresented in the kinds of college majors that lead to higher salaries, according to a 2016 study by the Georgetown University Center on Education and the Workforce. It found that while Black residents represented 12% of the U.S. population, Black students accounted for just 8% of general engineering majors, 7% of mathematics majors, 7% of finance and marketing managers, and 5% of computer engineering majors.

The Georgetown report doesn’t advance a theory that explains why the disparity exists. However, a Pew Research Center survey found that “most Blacks in STEM positions consider major underlying reasons for the underrepresentation of Blacks and Hispanics in science, technology, engineering and math occupations to be limited access to quality education, discrimination in recruitment and promotions, and a lack of encouragement to pursue these jobs from an early age.”

The Long-Term Impact of Student Debt

Student debt can have a ripple effect across many aspects of people’s lives for years or decades. Though that’s true for all races, it may disproportionately affect Black students, who are more likely to take on debt in the first place. The Federal Reserve’s most recent Report on the Economic Well-Being of U.S. Households found that “adults carrying student loan debt report lower levels of financial well-being than do similar adults who do not have outstanding debt.”

In particular, student loan debt can impede saving for retirement. “Forty percent of adults under age 40 with at least a bachelor’s degree who had outstanding education debt felt their retirement savings plan was currently on track. This compares with 56% who previously had debt and 55% who never had debt,” the Federal Reserve reports.

Similarly, a 2016 Consumer Reports survey found that 37% of respondents said they had delayed saving for retirement or other financial goals because of student loan debt, 28% had put off buying a house, and 12% had postponed getting married.

Closing the Racial Wealth Gap

One widely discussed proposal for narrowing the racial wealth gap is canceling student debt. For example, a brief from the Roosevelt Institute shows that "canceling up to $50,000 of student loan debt per borrower would immediately increase the wealth of Black Americans by 40%."

Some advocates would forgive all student debt, regardless of race or income, while others would limit it to lower-income households; however much as this might help in other ways, that step is unlikely to eliminate the wealth gap problem all by itself.

To help alleviate financial struggles during the COVID-19 pandemic, President Biden paused federal student loan repayments on his first day in office—and he has since extended the pause multiple times, to where it now extends through Dec. 31, 2022.

In aggregate, the U.S. Department of Education estimates that student loan relief will help 41 million borrowers save a total of $5 billion each month (the emergency relief paused loan payments and interest).

The massive American Rescue Plan Act of 2021, signed into law in March 2021, didn’t provide student loan forgiveness per se but did include a provision that makes any forgiveness tax-free through December 2025, seemingly paving the way for further congressional action. As Senate Majority Leader Chuck Schumer noted, “At the moment, debt cancellation is usually treated as taxable income, so without this provision, forgiving a student’s debt would stick them with a tax bill, giving with one hand and taking away with the other.”

Schumer added that he believes “the current administration has the legal authority to forgive up to $50,000 in federal student loan debt—a life-changing policy decision that would boost our economy and help close the racial wealth gap.”

In August 2022, the White House announced debt relief of up to $20,000 for graduates and current students that held Department of Education Pell Grants and up to $10,000 in relief for non-Pell Grant recipients. Borrowers' income cannot exceed $125,000 or $250,000 for married couples.

However, as of Nov. 11, 2022, the Department of Education is no longer accepting applications for student loan forgiveness after federal courts issued orders blocking the Biden administration plan.

When Do Student Loan Repayments Resume?

President Joe Biden paused student loan repayments and set interest rates to 0% to help alleviate financial hardships during the COVID-19 pandemic. The administration has extended the pause multiple times, and unless that happens again, loan repayments are set to resume after Dec. 31, 2022.

What Is a Pell Grant?

The Federal Pell Grant program offers need-based grants to low-income undergraduate and certain graduate students to improve access to postsecondary education. Unlike loans, Pell Grants do not have to be repaid. For the 2022-2023 year, the maximum grant is $6,895, and you can receive up to 12 terms (roughly six years) of Pell Grant awards. You must complete a Free Application for Federal Student Aid (FAFSA) each year you wish to apply for the grant.

The Biden administration announced debt relief for certain student loan borrowers. Department of Education Pell Grant recipients could receive as much as $20,000 in debt cancellation while non-Pell Grant recipients could receive as much as $10,000 in relief provided they meet income requirements.

However, as of Nov. 11, 2022, the Department of Education is no longer accepting applications for student loan forgiveness after federal courts issued orders blocking the plan.

What Is the FAFSA?

The FAFSA—the Free Application for Federal Student Aid—is the official form prospective and current students use to apply for federal grants, loans, and work-study programs to pay for college. Additionally, many colleges use the FAFSA to distribute financial aid and scholarships.

The U.S. Department of Education collects and processes your FAFSA and uses the information to determine what you and your family can afford for college—and how much aid for which you qualify. You must renew the FAFSA each year you're in school to remain eligible for student aid.

The Bottom Line

Because of the racial wealth gap in the U.S., members of racial and ethnic minority groups often must borrow more money for education than their White peers. For those who go on to well-paying careers, student debt may prove to be a good investment; however, the debt only exacerbates the problem for students who fail to graduate—or who graduate with low-value degrees.

Article Sources
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