How the student loan system harms vulnerable borrowers

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A monthly newsletter that explores issues facing historically Black colleges and universities and follows the work of our HBCU Student Journalism Network. By Naomi Harris.

A broken system

It’s widely known that the burden of student loan debt disproportionately affects borrowers of color. In particular, Black borrowers are more likely to default on their loans and carry larger debt loads than white borrowers.

It’s one example of the inequities facing Black students, who are also more likely to attend historically underfunded institutions and be targeted by and enroll in for-profit colleges.

Earning a college degree doesn’t even necessarily shield Black students from being unable to make loan payments — “Black graduates with bachelor’s degrees default at higher rates than white students who do not complete a credential,” New America said in an analysis of student loan defaults released earlier this week.

The think tank zoomed in on the experiences of nearly 50 borrowers who defaulted on their student loans, via focus groups. About half of the participants were Black borrowers.

“We know the default system is broken, but it’s especially harming these borrowers who are vulnerable in other ways as well,” Sarah Sattelmeyer, the project director of education, opportunity and mobility at New America, told me. Sattelmeyer co-researched the project.

A borrower defaults when they miss at least 270 days worth of student-loan payments. As of March 2022, 7.5 million borrowers — nearly one in five — were in default on their federal student loans, according to New America. This situation not only causes financial stress, but it contributes to the existing racial wealth gap.

I’ve explored these ideas in this newsletter before. I wanted to raise them again in light of this report, and because the U.S. Supreme Court is set to review the legality of President Joe Biden’s student-loan forgiveness plan in February.

For the moment, lower-court rulings have blocked the plan, which would forgive $10,000 in federal student loans (and $20,000 in loans for Pell Grant recipients). Canceling $10,000 of debt would clear out the loan balances for 2 million Black borrowers, reducing the share of Black people with student loan debt from 24% to 17%, according to estimates.

The study also notes that while borrowers who don’t graduate tend to hold less than $10,000 in debt, those debt loads are hard to manage without the financial return of a degree.

Those who defaulted often had other costs to juggle that took precedence over loan payments, like rent, transportation, and childcare, the report found.

Intergenerational consequences

When a borrower defaults on their student loans, there are many other financial consequences, Sattelmeyer said.

Borrowers can have their wages seized, their benefits withheld and their credit scores damaged.

“When the student loan repayment system does not work well, college can end up being a lot more expensive on the back end for those who least afford it,” she says.

Abby Shafroth, a staff attorney at the National Consumer Law Center, works with borrowers who defaulted on their student loans. She notes that, for many of her clients, the consequences extend to their families too. For example, mothers who can’t pay back their loans and then end up losing access to federal benefits, like the Earned Income Tax Credit.

“That has tremendously negative, intergenerational, downstream ramifications and makes it much less likely that those students are going to be able to pursue higher education or be successful in school,” Shafroth told me.

Borrowers who default on their loans are as a result more likely to say their experience in college wasn’t worth it — and they may discourage their family members or friends from pursuing a degree, the study said.

The Biden administration has tried to offer some relief while its forgiveness plan is deadlocked, extending its repayment pause into the first half of 2023. If the lawsuit is unsolved by June 30, then monthly payments will begin 60 days after that date, according to the Department of Education.

“The Department and Congress really need to be thinking about opportunities for large-scale change in the future and remedy some of the system failures we’ve seen in the past,” Sattelmeyer said.