Student Debt & Racial Wealth Inequality

In my new working paper, I argue against the idea that student debt forgiveness is a regressive policy. In particular, I argue against claims that the student debt forgiveness plans proposed by 2020 Democratic Presidential candidates Elizabeth Warren and Bernie Sanders amount to handouts to well-off white people. (To download the output data behind the charts in the paper, click here.)

My research contrasts with the received wisdom on the impact of student debt cancellation on racial wealth inequality, and more generally with the conventional wisdom on the distributional impact of student debt cancellation along dimensions other than race. The idea that student debt cancellation is a giveaway to the rich just isn’t sustainable in the data.

In fact, my results show that the set of households with student debt is a relatively disadvantaged, rather than a relatively advantaged, subset of the population. In combination with prior work, we can say that the distribution of student debt has been shifting down the distribution of income and wealth: those with lower economic status account for a larger and larger share of outstanding student debt over time, because 1) they have to take on more of it than they once did in order to enter the labor force (i.e., more than zero), and because 2) they have more trouble paying it off, as wages have stagnated in the labor market and repayment periods have lengthened. Whereas once student debt was a marker of relative privilege in the labor market—confined to high-status graduate degree holders—it is increasingly a mark of relative lack of privilege.

My new working paper focuses on the implications of student debt cancellation for racial wealth inequality. The more debt cancellation there is, the more racial wealth inequality is reduced—at least among the plans that have actually been proposed. It might be possible to construct a student debt cancellation plan that worsened racial wealth inequality—by explicitly or implicitly barring black people from it, for example—but such a plan is not actually on the table.

In contrast with the rhetoric of regressivity and college being “worth it” because of the lifetime college earnings premium, student debt matters less to the wealth portfolios of richer people. The fact is that high-wealth households get to be where they are not because they took on student debt in order to obtain valuable degrees, but because they didn’t take on student debt to obtain those degrees and high social and economic status—or, if they did, that debt has already been paid off. This is the sense in which Matt Bruenig’s analysis of the distributional impact of student debt cancellation is flawed: the set of households with outstanding student debt is not an arbitrary delineation of households, relative to those households who didn’t go to college or who paid off their debt. In fact, the set of people with outstanding student debt is a good approximation of the set of people most harmed by the policy failure of student loan debt: the vast expansion of student borrowing against a credentializing labor market with stagnant wages and a “last in, first out” hiring dynamic that particularly disadvantages people of color. This, fundamentally, is why student debt cancellation is racially egalitarian.

Confronting this policy failure—and the shift it represents in moving the cost of job training from employers, institutions, and states onto individuals—requires interrogating the “skills gap” ideology that motivated the formation and subsequent expansion of the federal student loan program. Starting in the late 1960s, the federal government began to adopt the thinking behind the economic concept of “human capital” into public policy: that the role of education, especially higher education, is for individuals to “invest” in their future earning power by obtaining skills in their youth that raise their value to employers over the course of their careers. According to such thinking, the role of public policy in higher education is, if anything, to complete the capital market: to ensure that individuals can finance their upfront investment in human capital, at a time in their lives when they lack the ability to collateralize such an investment. Thus, the government has a role, albeit a limited one: to guarantee private loans (and much more recently, to act as the direct lender), through which individual students can obtain access to the skill-formation that is the core function of higher education.

It’s important to recognize that this conception of what higher education policy aims to accomplish post-dates the expansion of public higher education that occurred following the passage of the GI Bill, as well as state-led efforts to build out university systems, such as the California Master Plan of the early 1960s. Those policies radically expanded access to Higher Education, and in doing so, they opened it up to a student population that looked very different from state tax bases. This dynamic of racial division came to a head in the public mind with the campus protests for civil rights and against the Vietnam War that characterized the late 1960s.

As a result of that, the expansion of institutional support for higher education out of public budgets appeared to have introduced societal dislocation and conflict onto campuses, along with the influx of new students. Shifting the focus from supporting institutions to supporting individual students, through student debt, and shifting the policy aim from providing a public good to completing the capital market for investment in needed labor market skills, thus had an attraction to federal policy-makers, as evidenced by the Rivlin report of 1969 and the subsequent reauthorization of the Higher Education Act in 1972, which created Pell Grants and Stafford Loans.

More recently, economists have stressed that wage stagnation and labor market inequality are caused by a “skills gap”—that workers lack the skills necessary for today’s jobs. The existence and supposed growth of the college wage premium, the gap between average labor market earnings of high school graduates and college graduates, has been interpreted as evidence of this skills gap. Thus, the policy solution is to expand the federal student loan program so that more students can have access to increased educational attainment. The availability of federal loans has operated in tandem with shrinking state support for higher education institutions, as policy-makers have used the college wage premium to justify shifting those costs onto students in the form of higher tuition. Supposedly, the increase in debt necessary to finance that tuition would ultimately be sustainable because the degrees obtained would pay for themselves by causing students’ earnings in the labor market to increase.

The final piece of the policy and economic background for the student debt crisis and its sharp racial dimension is labor market credentialization and underlying racial wealth inequality, as well as racial segregation in higher education institutions. When the costs of higher education were individualized, those with more family wealth in their backgrounds were better able to shoulder them, and that meant white people. Moreover, labor market discrimination means that black students have to obtain more degrees, and go into more debt, to obtain the same jobs with the same salaries that white people can obtain with fewer degrees and less debt. Finally, white students have access to institutions with larger sources of external support, so racial wealth gaps are essentially replicated at the institutional level. In the worst case, budget cuts to black- and Hispanic-serving institutions have pushed minority students into the predatory for-profit sector, or induced such institutions to become more predatory on their own student bodies themselves.

The idea that higher education would equalize outcomes by race, regardless of family background, turned out to be a myth: the disposition of policy to de-fund institutions and increase tuition and debt operated against that racially inegalitarian background to widen racial wealth disparities through the “new” instrument of student debt, just as the expansion of housing credit to non-traditional borrowers in the 1990s and 2000s was presumed to be racially egalitarian, but in fact widened racial wealth gaps when the housing bubble burst. In the case of student debt, the bubble isn’t going to burst in the same spectacular fashion that it did in housing because the debt is unsecured, so a debt deflation scenario following a firesale cannot take place. Instead, there is a long, slow diminution in the value of the degrees the student debt financed, in the form of labor market credentialization that worsens the earnings distribution conditional on any one degree and drives people to therefore seek more of them, and take on more student debt to do so, without ever being able to pay it off.

Worsening student debt repayment schedules for sequential cohorts bespeaks this policy failure, and it is why student debt cancellation is on the table as a policy solution at all. In fact, it is already implied by existing Income-Based Repayment programs, which cap payments as a percentage of current income and so push repayment schedules into the indefinite future. This is de facto debt cancellation through the back door, since it reduces the present value of debt repayments, and since IBR programs come with cancellation provisions following a maximum number of years in repayment (10, 20, or 25, depending on the program), there is already a great deal of cancellation baked into the system. The worse the labor market performs, the larger the implied cancellation. It should be emphasized here that the expansion of student debt and, by that means, higher education attainment, was supposed to be the mechanism by which the labor market would be made to work better, and earnings to grow for better-educated workers.

Summing up, the racial inequality dimension of the student debt crisis requires us to question whether the skills gap and human capital ideology that motivates recent and current higher education and student debt policy is correct—both as a matter of social science and with regards to its ability to achieve its normative policy aims. If one such aim is to mitigate wealth disparities by race, the current system is failing dramatically. Cancellation would rectify the disparities in racial wealth that the expansion of student debt has caused.

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