Does Income-Based Loan Repayment Push Borrowers of Color into Debt?

“It’s not the amount I borrowed that’s killing me – it’s the interest.”

Students across the country echo this sentiment. And new research shows the problem is getting worse.

To actually reduce the amount you owe on a loan, you need to pay enough money each month to cover both the interest and some of the principal (the amount you actually borrowed). Otherwise, interest accumulates and you end up owing a lot more than what you originally borrowed.

This has happened to young student loan borrowers over the past decade, and the trend has hit young people of color the most.

In 2019, 62% of borrowers aged 18 to 35 living in “majority minority” postal codes, that is, where the majority of residents were people of color, owed more than they borrowed. originally, compared to 34%. ten years earlier, according to research published in November by Marshall Steinbaum, principal investigator at the Jain Family Institute.

“But it’s not that people don’t have enough money today to pay off loans, it’s that they will never have enough money.”

Marshall Steinbaum, Principal Investigator, Jain Family Institute

What drives this peak is interest, which accumulates year after year. Too many borrowers simply cannot afford to get on their debt.

Part of the reason, Steinbaum argues, is a policy meant to help students cope with their growing debt load.

In 2007, Congress introduced a new version of income-based repayment plans (called IDRs), which allowed student borrowers to pay a small amount each month in proportion to what they earned. Students could pay $ 20 a month, or even nothing if they were really short. The idea was to help students who did not make a lot of money at the start of their careers. More and more students turned to the program following the devastating economic crash of 2008.

Related: More Students Take Private Loans As College Costs Rise

One-third of black borrowers on repayment in 2017 with a bachelor’s degree were using these payment plans – a much higher rate than other borrowers, according to a report from the Center for American Progress.

Students were encouraged to enroll in the program, on the assumption that when the economy recovered, borrowers would get decent jobs and could start paying more each month. But that did not happen.

“The principle behind IDR is that individuals only need a few years of reduced payment until they can start paying more,” said Steinbaum, who is also an assistant professor at the University of Utah.

“But it’s not that people don’t have enough money today to pay off loans, it’s that they will never have enough money.”

The policy seems to have saved some people from default by reducing the amount required in monthly payments. Although the three-year default rate is still extremely high at 9.7% in 2017, it is down from 14.7% in 2010.

But again, many black borrowers did not enjoy the same benefits as their peers. Half of black borrowers those who entered university for the first time in 2003 defaulted on their student loans within 12 years; the comparable figure for white students is 21 percent.

The racial disparity stems from the wealth gap between black, Latin and white families as well as discrimination in hiring, Steinbaum said, and discrimination in higher education.

In 2019, 62% of borrowers aged 18 to 35 living in “majority minority” postal codes, that is, where the majority of residents were people of color, owed more than they borrowed. initially, compared to 34% over 10 years. earlier, according to research by the Jain Family Institute

“Segregation in higher education is precisely why black borrowers have so much more debt,” he said. “Through segregation, black students are directed to institutions that are under-resourced and more dependent on their own students to support themselves.”

Colleges with less public funding and lower endowments do not have as much financial assistance to offer to students who need it most, resulting in even higher debt levels. Many also have lower graduation rates. Students who fail to graduate find themselves without the degrees they need to find well-paying jobs. Without a decent income, their monthly loan payments remain low and interest increases.

A recent report by the New York City Department of Consumer Affairs found that the five colleges with the highest percentage of black students had some of the worst repayment rates in the city.

Related: Universities that welcome more poor students have less financial aid to give

Steinbaum’s findings are in line with what other researchers have found. Young adults who have to borrow money to go to college are underwater, unlike their parents’ generation, according to one report by Young Invincibles, an advocacy and policy group.

In 1989, college graduates aged 25 to 34 with student loans had a median net worth of about $ 90,000. In 2016, the net worth of young adults with the same debt status was minus $ 1,900.

Kyle Southern, director of policy and advocacy for higher education and the workforce at Young Invincibles, argues that specific policy decisions, such as tax cuts and cuts to higher education funding, explain the high debt levels and low wealth of Millennials.

“You have to have a college degree to get a good job, but you can rely less and less on your state to reduce the cost of education,” he said. “It’s an economy that young people lack and leaves them facing negative wealth early in their careers. “

Steinbaum believes the debate in Washington over student debt cancellation is missing a key point. After 20 or 25 years of payment, depending on a student’s income-based repayment plan, the unpaid portion of the debt is written off, or in other words, canceled.

If the new Biden administration adopts some form of debt cancellation, it could help ease the current crisis. But without a fundamental shift in higher education policy, according to Southern and Steinbaum, the next generation of students will be in the same situation as young adults in debt.

This story of income-based loan repayment was produced by The Hechinger Report, an independent, nonprofit news organization focused on inequalities and innovation in education. Sign up for our higher education newsletter.

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About Carrie Scheer

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