How a controversial government loan product is fueling the racial wealth gap

Government loans that parents can use to help their children pay for their college education can exacerbate the already large wealth gap between black and white families.

About a third of black families who depend on Parent PLUS loans – the product offered by the federal government to help parents finance their children’s college – have incomes below $ 30,000, according to an analysis of data released this week. by New America. , a DC-based think tank. According to the study, only 10% of black borrowers from Parent PLUS are from families earning more than $ 110,000.

The reverse is essentially true for white families who rely on Parent PLUS loans. About a third are from families earning $ 110,000 or more and about 10% are from families earning $ 30,000 or less, according to the study.

“It’s never a good sign” to see such different race-based results in a federal program, said Rachel Fishman, assistant director of research at New America’s education policy program and author of the study.

I wonder how we reached over $ 1 trillion in student debt? Check it out.

The document adds nuance to the debate over a controversial product. It is also the latest evidence that our university financial system is fueling the racial wealth gap.

Parent PLUS loans, which allow families to borrow up to the full cost of attending college, may be one of the few ways families without access to much wealth or credit can pay for the cost of attending college. ‘university. On the other hand, there is evidence that because the government distributes the money without worrying too much about whether borrowers can repay, loans can trap families with unsustainable levels of debt. In addition, the government offers less protections to borrowing parents who have difficulty repaying than it offers to students, but it uses the same collection powers – including wage garnishment and social security – to collect the debt.

Fishman’s analysis indicates that black families are more likely to rely on Parent PLUS loans to pay for their education, possibly because they have less income and wealth to draw on, on average, than white families to pay their bills. studies. A history of racial discriminatory practices, such as redlining, means that black Americans are at a disadvantage when it comes to key strategies for accumulating wealth, such as owning a home.

College is often seen as a way for black Americans and other disadvantaged groups to level the playing field, but given that they often have to acquire unsustainable levels of debt to do so, higher education doesn’t go as far as it could to put black students and families on an equal footing, Fishman notes.

“It is this endless cycle of policies that promote wealth among white families while discouraging wealth among black families,” she said.

Some policymakers, including Republican congressional leaders, have suggested capping Parent PLUS loans to prevent families from accumulating insurmountable debt. But that wouldn’t solve the problem, Fishman said. This is because families with few resources would have even fewer options to pay for school, especially since private lenders are unlikely to look after them. Even if private lenders were willing to lend money to low-income parents, the products might not have the same financially beneficial features as federal student loans, such as fixed interest rates. “I’m nervous about what happens if you let the private market prevail on its own,” Fishman said.

Instead, she suggests that the government put in place a system that checks whether a Parent PLUS borrower actually has the capacity to repay the loan. Otherwise, the government should allow the student to take on more debt (within certain limits). This would at least ensure that the family uses the government loan program with as much protection as possible.

But a broader step that policymakers could take to address this challenge would be to invest taxpayer dollars in public higher education so that low-income families of color are more likely to pay for school without depending on loans. . Historic levels of state divestment in public colleges and universities have helped fuel recent tuition fee increases. And federal investment in higher education does not follow; the Pell grant – money provided by the government for low-income students to attend college – covers the smallest share of tuition fees in 40 years.

This has made families more dependent on loans to pay for their education. “The answer is that we need to move away from this debt-financed model, especially for black families,” she said.

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