By the Student Borrower Protection Center | April 6, 2021
A growing body of evidence suggests that the student debt crisis is exacerbating America’s stark economic inequalities, with huge consequences for disparities across race and gender.
In recent years, economic inequality has reached unprecedented levels in the United States. At the same time, the nation’s student debt has topped $1.7 trillion, reaching crisis levels as another borrower defaulted every 26 seconds even before COVID and millions more struggled to make ends meet. Researchers are increasingly sounding the alarm that these two phenomena are related.
Economic Inequality in America
The state of wealth and income inequality in America is increasingly stark. Average incomes for the top 0.1 percent of Americans have more than tripled since 1979 while growing by less than a quarter for the bottom 90 percent of earners over the same period. The top five percent of the richest households in the U.S. went from claiming roughly half of aggregate wealth in 1962 to having two-thirds of it by 2016, all while the bottom 90 percent of households’ share of wealth went from roughly a third to barely a fifth.
Meanwhile, real earnings for middle-income households haven’t budged since the 1970s, one-in-seven children in the U.S. lived in poverty even before COVID, and financial disparities across race and gender are wider than ever.
Student Debt and Economic Inequality
As more and more American families take on greater debt, the populations hit hardest by this burden are those who see the most significant disparities in income and wealth.
A wide range of research shows that student loan borrowers who come from low-income and less wealthy backgrounds—an outsized share of whom are women and borrowers of color—are more likely to rely on loans to pay for their education, to take on greater amounts of debt when borrowing, and to fall into delinquency or default after leaving school. The burden of repaying these loans, even if borrowers are able to access programs designed to make repayment more affordable, actively prevents borrowers from climbing the socioeconomic ladder. This situation reveals not just that student loans are not “good debt”, but that the choice to base college access on credit for those who can’t already afford it has undercut the fundamental promise of education as a “great equalizer,” as the value gained from a college degree is necessarily different for those who have no choice but to rely on debt to access higher education.
The need to address socioeconomic inequality and its effects across race and gender in this country has never been more dire.
Below are some of the key data on how the student debt crisis is further driving economic inequality across America:
- Scholars at the think tank Demos have estimated that student loan debt will lead to total lifetime wealth loss of $4 trillion for indebted households and that “for low-income and minority borrowers, the lifetime cost of student loans will likely be even greater. . . .” The authors explain that roughly two-thirds of the loss in wealth comes from student loan borrowers saving less for retirement, while most of the remaining third comes from borrowers having less ability to build equity in their homes.
- A researcher at Princeton found that college graduates with an additional $10,000 of student debt have incomes that are one to two percent lower after graduation, even when accounting for additional factors such as family income and college characteristics. Moreover, the author noted that student debt is “permanently scarring” for graduates’ earnings, with student loan borrowers not experiencing any faster income growth down the line that could make up for the disadvantage at the start of their careers. The author speculates that these results “are driven by a subgroup of graduates who report that debt has constrained their labor market decisions,” as the presence of student debt places pressure on graduates to take the first job they can find, even if that job involves lower wages.
- Economists at the Federal Reserve Bank of Boston found that average wealth accumulation by age 40 is up to seven times higher for those without student loans, noting that “cash holdings (assets held in checking and saving accounts) are noticeably lower for homeowners with student loan debt than for homeowners without student loan debt . . . .” The authors speculate that the “lower pace of wealth accumulation” among student loan borrowers may “reflect these households’ greater debt service burden due to their student loan debt,” making them less able to build up equity in a home.
- Researchers at the JPMorgan Chase Institute have found that student loans are much more likely to weigh down low-income borrowers, holding them back from building wealth. For example, the researchers found that while the median student loan borrower pays 3.8 percent of his or her take-home income toward his or her student loan bill, many low-income borrowers face monthly student loan burdens equal to well over 10 percent of their income. Reflecting on the unequal burden student loan debt places on low-income people, the authors offer that student loan debt “has the potential to perpetuate intergenerational wealth inequalities and place undue burdens on parents.”
- A paper from the Roosevelt Institute notes that growing levels of student loan debt are disproportionately attributable to people pursuing credentials simply to maintain the same level (or lower levels) of income that previous generations enjoyed in the same job. This meaning that the debt burden associated with a degree is now less likely to be offset by a wage premium. The authors describe the phenomenon as follows: “[j]obs are scarce, so they go to the credentialed, and individual workers obtain credentials (using student debt) to ensure that they can get a job. So, for example, individuals with bachelor’s degrees take jobs that would not have previously required one, but those jobs do not pay any better despite the fact that the people doing them are better educated.” As a consequence, the authors note that “there are many young adults who now have some student debt, whereas if they had been born in an earlier cohort, they likely would not.” This observation implies that student loan debt increasingly burdens and holds back low-income people.
- Analysts at the Federal Reserve Bank of New York have found that student loan debt is the largest contributor to households having negative net wealth, noting that student loan debt accounts for almost half the debt (47 percent) of the most indebted households. The next largest contributor, mortgage debt, accounts for less than half as much of these households’ debt (22 percent). Reflecting on these findings, the researchers noted, “Given the importance of student debt in explaining negative household wealth, as seen above, it is likely that the steady growth in student debt and borrowing, combined with the very slow rate of student loan repayment we have documented elsewhere, has materially contributed and will continue to contribute to negative household wealth and wealth inequality.”
- Researchers at the University of Kansas have found that increasing a borrower’s student loan balance by $10,000 causes that borrower to achieve the median level of wealth in the U.S. 26 percent more slowly and the median level of income 9 percent more slowly. The authors note that this has a direct impact on social mobility, saying, “[t]hese findings suggest that over the course of a college graduate’s lifetime, those who acquired student debt enjoy fewer opportunities to move up the economic ladder than their counterparts without student loan debt.”
- A study from the Washington Center for Equitable Growth showed that the average student debt-to-income ratio for households at or below the median income level is 103 percent—more than double the average ratio for the same group in 2001 (50 percent) and roughly ten times greater than the current average ratio for the richest 10 percent of households by income. Moreover, almost one-in-four Black Americans who attended college for any period of time had a debt-to-income ratio greater than 100 percent in 2019 compared to roughly one-in-ten White Americans.
- Researchers at the Federal Reserve Bank of New York have found that young student loan borrowers are engaging in a “retreat” from homeownership, a key driver of long-term wealth generation. The authors note that this is a break from history, as the data used to show that “more educated consumers” were “more likely to buy homes.” But the weight of student loan debt has become too great; whereas student loan borrowers used to be four percent more likely to own a home, they are now almost 2 percent less likely to do so.
Higher education is held in American society to be an equalizer of opportunity and a sure pathway toward the middle class. But our nation’s debt-fueled higher education system rips a hole in the center of that fabric, cementing a trajectory of downward mobility for generations of student loan borrowers. The COVID-19 pandemic is only exacerbating this crisis, with recent survey data indicating that the proportion of low- to moderate-income households behind on their student loan bills due to the pandemic is twice as high as the rate for moderate- to high-income households (18 percent v. 9 percent).
Addressing economic disparities and ensuring fair, inclusive growth across the economy requires that policymakers at all levels tackle the student debt crisis. It’s time for higher education to fully live up to its promise as a pathway toward a better future for all.
Read more in our Research Roundup series, including how student loan debt holds back the small business community, how student loan debt affects rural communities and farmers, and how student loan debt affects public health.
The Student Borrower Protection Center is a nonprofit organization focused on alleviating the burden of student debt for millions of Americans. The SBPC engages in advocacy, policymaking, and litigation strategy to rein in industry abuses, protect borrowers’ rights, and advance economic opportunity for the next generation of students.