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Student Debt, Racial Inequality, and the American Dream

Studies estimate that about 5 percent of the racial wealth gap can be blamed on student debt.

For generations, we have thought of higher education as the embodiment of the American Dream. No matter how difficult the circumstances you grow up in, or where you come from, you can work hard, earn a college degree, and set off down the path to a better life — a path that will allow you to buy a home, have a family, and give your children more opportunities than you had yourself. 

Student debt has traditionally been seen as a reasonable burden to bear on that journey to a better life. But growing concern about student debt — and growing recognition of how deep racial inequity runs in society — is changing that narrative. Today, some scholars and policymakers are saying that the promise of the American Dream is a broken one, that student debt is making inequity worse, and in particular widening the gap in wealth between Black and white families. 

Studies estimate that about 5 percent of the racial wealth gap can be blamed on student debt. Here are a few reasons to be concerned:

  • Student Debt Weighs More Heavily on Black Students. Black families have dramatically less wealth than white families. Black students are also less likely than white students to attend highly selective colleges — the institutions that tend to offer the best financial aid and the biggest income payoff for graduates. They are more likely to leave college without a degree and take on more debt on average.

Black borrowers also struggle a great deal more to pay back student debt. A dozen years after starting college, white borrowers still owe about 65 percent of what they borrowed, while Black borrowers owe 113 percent.

  • The Same Degree Means Something Different for People of Different Races. Research shows that racial and gender bias are pervasive in hiring and pay; for example, candidates with African American-sounding names get fewer responses to their resumes. Which means that people of color often get less of a boost in life and in their career from any given degree than white Americans. That drives Black graduates in particular to pursue higher degrees, thus taking on more debt.

The long-term racial wealth gap and ongoing discrimination reinforce each other. The Education Trust finds that Black adults with a college degree have less wealth than white adults who haven’t even completed high school.

  • Public Investment in Higher Education has Declined as Diversity has Risen. Many states cut higher education funding in the wake of the Great Recession and were very slow to reinvest. The cost of college is falling more heavily on tuition and student debt. Meanwhile, the population of college students has grown more and more diverse. 

On the other hand, those who think that it’s exaggerated to suggest that student debt is worsening inequality point out the following:

  • You Need a College Degree to Make a Good Living in Today?s Society. The share of job vacancies requiring a bachelor’s degree increased over 60 percent from 2007 to 2016. Two out of every three jobs require some education beyond high school. While it is important for students to choose programs that offer a reasonable likelihood of success in school and on the job market, there really aren’t a lot of alternatives to college that allow Americans to get ahead.
  • Borrowers with Large Amounts of Debt are Disproportionate to Those with Lucrative Graduate Degrees. The typical MBA graduate has $42,000 in debt. The typical medical school graduate has $162,000 in debt. By and large, these graduates are getting a big boost in income thanks to their education, and their debt will prove to be a worthwhile investment in their career and their family’s wealth.
  • Maybe Debt is the Symptom, Not the Problem: When a borrower can’t repay their debt, it’s often because they left college without a degree or they went to a program with a poor value proposition, meaning it doesn’t lead to a good job that would make the debt manageable. These are huge problems in the higher education system. Too many programs fail to pay off, and many colleges are underfunded and don’t offer students the support needed to finish their degree. Fixing those problems would help ensure that student debt is a path to economic success, not a dead end. 

Clearly, student loans are a crucial tool for millions of Americans to pursue an education. They are also a burden that falls heavily on some borrowers. Keeping that burden bearable and fair is something for policymakers, college leaders and students themselves to wrestle with in the years to come.

A resource from the Peter G. Peterson Foundation, created with collaboration from the Center for American Progress (CAP) and the American Enterprise Institute (AEI).

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