U.S. Economy

Student Debt and the White-Black Wealth Gap

Borrowing a lot for a subpar education hurts.

Worth it?

Photographer: Christopher Furlong/Getty Images

Why have black Americans had so little success in closing the wealth gap with whites? One partial explanation: They're taking on a lot of debt to get educations that too often don’t pay off.

Last week, I explored Federal Reserve data that pointed to a discouraging conclusion: Despite some success in reducing disparities with whites in areas such as education and employment, black Americans hadn't made any progress in narrowing the wealth gap. As of 2013, the difference was even larger than it was in 1989.

Among the various explanations, there's one I left out: the cost and quality of education. The more debt people must take on to go to college, the lower their net worth (defined as assets minus debts). Also, their ability to pay down that debt -- which is the same as building wealth -- depends to a large extent on what they study.

Black Americans' gains in education have come at an expensive time. Tuition costs have risen much faster than the overall rate of inflation, and federal grant programs haven't kept pace. As a result, from 1989 to 2013, average student debt among black families has increased more than 10-fold, leaving them about 31 percent more indebted than the average white family. Here's how that looks:

Average Education Debt by Race

Source: 2013 Survey of Consumer Finances

Note: Amounts are in 2013 dollars

Much of the borrowing hasn’t gone toward valuable degrees. For-profit colleges of dubious quality have focused disproportionately on recruiting black students, who can be lucrative targets thanks to their eligibility for federal grants and loans. The colleges get the money, while the students are left with big debts and poor job prospects. Even if they have the same qualifications as whites, black workers face added obstacles to landing good-paying work.

Such educational snafus are particularly damaging because student debt is so difficult to discharge. It can't be written off except in the most severe hardship cases, meaning that it can weigh for decades on people's ability to build wealth. It also crimps consumption, creating a long-term drag on the economy.

What's the solution? For one, the government can offer more aid in the form of grants and focus it on the best-value institutions, so students graduate with less debt and better career prospects. It can also pull funding from for-profit colleges that demonstrably prey on vulnerable people, and do more to ensure that the people who most need it get information on the costs and benefits of different kinds of institutions -- including community colleges.

Education is crucial to remedying the country's racial and wealth disparities. To fulfill that promise, though, it has to be the right kind at the right cost.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Mark Whitehouse at mwhitehouse1@bloomberg.net

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    James Greiff at jgreiff@bloomberg.net

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