Student Loans and the Racial Wealth Gap

Education can help narrow the gap, but student debt can often widen it

Higher education has long been seen as a ticket to upward mobility in the United States. In large measure, it still is, with college graduates earning nearly 75% more on average than their peers with just a high school diploma. Unfortunately, that ticket has become increasingly expensive. Today, 69% of college graduates leave school with student loan debt. The debt burden can weigh most heavily on members of 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 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.
  • Disparities in the types of degrees earned can also widen the gap.

What Is the Racial Wealth Gap?

For decades, economists have noted a substantial gap in net worth between White households and those of racial minority groups in the U.S. As of 2016, for example, White non-Latinx households had a median net worth of $171,000, compared with $17,600 for Black households and $20,700 for Latinx households, according to the Federal Reserve (Fed). The Fed’s “Other” race/ethnicity category, which includes households identifying as Asian, American Indian, Alaska Native, Native Hawaiian, Pacific Islander, or having more than one racial identification, reported a median net worth of $64,800.

One reason for the wealth gap is that there is also a racial wage gap. The same Fed study found that in 2016, White households had a median income of $61,200, compared with $35,400 for Black households and $38,500 for Latinx households.

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 borrowed to pay for college, compared with 70.3% of Whites. Black students also borrowed greater amounts: $34,010 on average, compared with $30,119 for Whites.

Latinx bachelor’s degree recipients, by contrast, were less likely to borrow (67.3%) and borrowed less money on average ($25,524) than either Black or White students. There are a number of theories as to why. A 2016 report from the Hispanic civil rights organization National Council of La Raza noted that many 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), which 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 aid of any kind.

However, both Black and Latinx students who take out loans are more likely than White students to have difficulty repaying them, according to a 2020 report from the Fed. It found that among borrowers under age 40 with education debt, 26% of Black borrowers had fallen behind in their loan payments, compared with 19% of Hispanic borrowers and 7% 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 who attend for-profit colleges generally take on more debt than those who attend 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 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 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 (NCES). It found that 64% of White students at bachelor’s degree-granting institutions graduated within six years, compared with 54% of Latinx students and 40% of Black students. Asian 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 little better in the labor market than their peers who stopped with a high school diploma. According to 2017 data from the U.S. Bureau of Labor Statistics, workers age 25 and older with some college had median weekly earnings of $774, compared with $712 for workers with only a high school diploma—a difference of about 9%. Bachelor’s degree graduates, on the other hand, had median weekly earnings of $1,173—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. 

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 Fed 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, a number of studies have shown that many employers believe a for-profit degree to be of less value than one from a public or private not-for-profit school. A 2018 working paper from the National Bureau of Economic Research reported that for-profit students not only earned less on average but also were less likely to be employed at all.

Enrollment data show that Black students are disproportionately more likely to attend for-profit schools. As of fall 2018, the NCES noted that “the percentage of undergraduate students at private for-profit four-year institutions who were Black (29%) was more than double the percentages at private nonprofit (13%) and public (12%) four-year institutions.” Latinx students represented 18% of undergraduates at private for-profit four-year institutions, compared with 13% at private not-for-profit schools and 20% at public institutions.

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 that 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 said it believed the change could help some 72,000 borrowers receive $1 billion in loan cancellation.

Some degrees pay off better than others

Regardless of the type of school that they attend, 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.

While the Georgetown report doesn’t advance a theory as to why that disparity exists, a 2017 survey from the Pew Research Center 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—and for quite a few years. While 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 Fed’s most recent “Report on the Economic Well-Being of U.S. Households” found that “adults carrying student loan debt reported lower levels of financial well-being than did similar adults without outstanding debt.”

In particular, carrying student loan debt can be an impediment to 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 Fed reported.

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.

What Are the Solutions?

One widely discussed proposal for narrowing the racial wealth gap is canceling student debt. Some advocates would forgive all student debt, regardless of race or income, while others would limit it to lower-income households. However much this might help in other ways, that step is unlikely to eliminate the wealth gap problem all by itself. For example, a 2015 analysis by the progressive think tank Demos estimated that “eliminating student debt for households making $50,000 or below would reduce the racial wealth gap between Black and White families by over $2,000, or nearly 7%.”

More recently, student loan forgiveness has become part of the larger discussion about reparations for the descendants of enslaved Black Americans, one objective of which is helping to close the racial wealth gap. A proposal to study the possibility of reparations in the last session of the U.S. House of Representatives had 168 co-sponsors and was backed by then-Democratic presidential candidate Joe Biden, who voiced his support in a June 2020 virtual town hall meeting hosted by the NAACP.

At a CNN town hall in February 2021, President Biden said he supported canceling $10,000 in student debt in response to the COVID-19 crisis but balked at the $50,000 in loan forgiveness advocated by some other members of his party.

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.”

The Bottom Line

Because of the racial wealth gap in the United States, members of 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, for students who fail to graduate—or who graduate with low-value degrees—the debt that they take on may only exacerbate the problem.

Article Sources

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