Student Loan Debt and the Racial Wealth Gap

Q: What race holds the most student loan debt?

Black adults are more likely to have outstanding student debt than their white counterparts. Research also shows that Black borrowers have higher student loan balances than their white counterparts on average. Black-white racial wealth disparities may help explain why Black borrowers accumulate more student debt than non-Hispanic white borrowers on average.

Q: Why is student loan debt a social problem?

Student loan debt can be difficult for some borrowers to repay, including college graduates in some cases. Student debt is a liability that diminishes a family’s net worth. A bigger social problem can develop when borrowers default on a student loan — an adverse event that can lead to wage garnishment and damaged credit.

Q: How does student loan debt exacerbate the racial wealth gap?

Black borrowers accumulate more student debt and have a harder time repaying their education loans than white borrowers on average. This exacerbates the racial wealth gap, because outstanding student debt diminishes a family’s net worth. Borrowing money to go to college doesn’t necessarily lead to upward mobility. Student debt is a liability, not an asset. Over 20% of Black college graduates defaulted on a student loan compared with 4% of white college graduates over a 12-year period, new research shows. Building wealth can be difficult for borrowers who default on federal or private student loans .

Student Loan Debt & the Racial Wealth Gap

Sulaiman Abdur-RahmanUpdated August 4, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Racial wealth gap data in the United States show white households hold 86.8% of overall wealth in the country compared with 2.9% for Black households. This racial wealth gap between Black and white families may partly explain why Black students have more student loan debt than white students on average.A major gap in median household net wealth and student loan default rates exists between Black and white families, research shows. Below we highlight the underlying data behind the student loan debt racial wealth gap.

What Is the Racial Wealth Gap?

The definition of a racial wealth gap is the disparity of net worth between two or more racial groups. Such a gap exists when comparing the median wealth of Black and white families. Household wealth is the total value of assets that a family owns, such as real estate, cars, stocks, bonds, profitable businesses, and cash. Non-Hispanic white families have a median household net wealth of $187,300 compared with $14,100 for Black households, according to U.S. Census survey data.Among all races, the typical non-Hispanic white family had more than double the amount of wealth compared with typical families of color or Hispanic heritage. That’s according to the Federal Reserve’s latest triennial Survey of Consumer Finances (SCF). The Fed’s analysis of the SCF provides a comprehensive look at household income and net worth nationwide.

History of the Racial Wealth Gap

A large racial wealth gap between Black and white families has existed in the United States ever since the nation abolished slavery in the 1860s. Systemic racism and redlining — the practice of denying mortgage loans in neighborhoods of color — prevented many Black families from realizing the dream of homeownership.Ownership of a primary residence is the leading source of median family wealth, according to Federal Reserve data. Racial discrimination in mortgage lending and residential real estate transactions prompted Congress to pass the Fair Housing Act of 1968.Federal laws against racial discrimination, however, have not eliminated the current race gap in homeownership and net worth.The Black homeownership rate stands at 44.9% compared with 74.5% among non-Hispanic white families who own residential property, according to the latest Census Bureau data. As mentioned earlier, non-Hispanic white families have a median household net wealth of $187,300 compared with $14,100 for Black households.

Factors that Influence the Racial Wealth Gap

Here are some of the factors that influence the racial wealth gap:

Homeownership rates
Ownership of financial and nonfinancial assets
Intergenerational transmission of economic resources
Mortgage denial rates
Student loan debt accumulation
Student loan default rates among college graduates
Poverty rates
Unemployment rates
Annual income disparities
Incarceration rates
The legacy of slavery and systemic racism

How Does Student Loan Debt Affect the Racial Wealth Gap?

Black borrowers accumulate more student debt than white borrowers on average. Black borrowers also have a harder time repaying their student debt than white borrowers on average, according to student loan debt racial wealth gap data.The average Black family has far less wealth than the average white family. This is one of the reasons why the average Black student borrows more money to pay for the cost of college than the average white student.As mentioned earlier, the definition of a racial wealth gap is the disparity of net worth between two or more racial groups. Non-Hispanic white families have a median household net wealth of $187,300 compared with $14,100 for Black households, according to the latest data.Racial disparities in wealth and student debt can be observed in the default rates of college graduates by race. Over 20% of Black college graduates defaulted on a student loan compared with 4% of white college graduates over a 12-year period, new research shows. Outstanding private and federal student loan debt diminishes a family’s net worth.

Can Student Loan Forgiveness Improve the Racial Wealth Gap?

A student loan forgiveness racial wealth gap policy could strengthen the Black middle class. Research by a group of sociology professors argues that student debt cancellation is a racially progressive policy that may benefit Black families more than white families on average.Black students accumulate more student debt and have a harder time paying back student loans than white students on average. Large-scale cancellation of $50,000 or more in student debt would diminish racial wealth gaps, according to a Roosevelt Institute analysis.Among students who graduated in 2016 with a four-year college degree, Black students on average borrowed $39,500 in federal student loans compared with $29,900 for white non-Hispanic borrowers, according to the National Center for Education Statistics.The impacts of student loan forgiveness could help reduce racial wealth inequalities if implemented as a highly progressive student loan forgiveness racial wealth gap policy.

Closing the Racial Wealth Gap

Large-scale student loan forgiveness — if implemented — may help reduce racial wealth inequalities. But a program of that magnitude would likely require an act of Congress.The U.S. Supreme Court rejected President Biden’s one-time student debt relief program in June 2023, ruling Congress did not authorize the cancellation of $430 billion of federal student debt. In addition to broad student loan forgiveness, policymakers could consider the following policies to help close the racial wealth gap:

Making it easier for students to access and receive Federal Student Aid (FAFSA®)
Expanding need-based financial aid
States allocating more higher education funding to address the rising cost of college
Streamlining student loan repayment options to help prevent delinquency and defaults
Making graduate school more affordable
Providing large-scale reparations to descendants of slavery

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The Takeaway

Black borrowers on average, especially Black women, use student loans more than any other demographic to help pay for the cost of college. Such racial disparities in student debt are fueled by the underlying racial wealth gap. Interest capitalization and total interest charges on student loan principal can impact Black borrowers more than white borrowers on average.Student loan refinancing may be right for you if you can lock in a lower interest rate, but the portion of your federal student debt that you refinance loses its eligibility for certain debt relief programs and federal income-driven repayment plans. Lantern by SoFi can help you compare student loan refinance rates. Explore your options without impacting your credit score and consider applying with a lender of your choice.*Find and compare student loan refinance options with Lantern.

Frequently Asked Questions

What race holds the most student loan debt?

Why is student loan debt a social problem?

How does student loan debt exacerbate the racial wealth gap?

Photo credit: iStock/Weekend Images Inc.

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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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