A Road Map to Relieving America’s $1.7 Trillion Student Debt

Although the year 2020 has been dominated by continuing news coverage of the COVID-19 pandemic that has now claimed the lives of nearly 300,000 Americans, it is not the only challenge facing the nation. Amid rising unemployment and food insecurity, an estimated 45 million Americans struggle at the same time with the crushing weight of more than $1.7 trillion in student debt.

A disproportionate amount of this financial burden is carried by Blacks and other borrowers of color. These racial disparities in student debt cannot be ignored: massive debts delay, if not if deny, wealth-building opportunities for Blacks and others who believe that higher education remains the bridge to a financially secure future.

Before the COVID-19 pandemic and its resulting recession, one of every four student loan borrowers was in either default or serious delinquency. Black students experience default at a much higher rate (37.5%) than their peers who are Latino (20%) or white (12.4%), according to an independent report by the Brookings Institution. Even after 20 years of loan repayments, the typical Black borrower still owes 95% of the original cumulative balance.

A new research report jointly released by the National Consumer Law Center (NCLC) and the Center for Responsible Lending (CRL) outlines the financial toll taken by this unsustainable debt and pinpoints remedies to systematically address the crisis.

In part, the report states: “Pursuit of education in America should not be such a high stakes gamble. … Borrowers who took out loans to access an education should not have those debts follow them to the grave.”

The report — “Road to Relief: Supporting Federal Student Loan Borrowers During the COVID-19 Crisis and Beyond” — encourages President-elect Biden to keep his campaign promise to cancel significant amounts of student debt among his first executive actions taken on his first day of office, and specifically recommends:

1. Across-the-board debt cancellation. All federal student loan borrowers (including PLUS loan borrowers and those with commercially- or institutionally held loans) should have their balances reduced. This ensures that the benefits of cancellation reach the most vulnerable borrowers and spurs economic recovery;
2. Clearing the books of bad debts. After cancellation, the federal government should clear the books of debts currently held by borrowers that have been in repayment for longer than 15 years, debts that have been in default for 3 or more years, and debts held by borrowers who have been receiving federal means-tested benefits for 3 or more years;
3. Restoring limitations on collections. Federal student loans should have common-sense consumer protection standards. Guardrails should include a statute of limitations, preventing the seizure of the Earned Income Tax Credit and Social Security benefits, limitations on the amount that can be seized, and limits on how long creditors can involuntarily collect. Student loans should also be dischargeable in bankruptcy; and
4. Making repayment truly affordable and budget-conscious. All borrowers on an income-driven repayment (IDR) plan or more than 30 days delinquent at the end of the COVID-19 pandemic should be auto-enrolled in a new IDR plan, the Affordable Budget-Conscious (ABC) repayment plan, that sets monthly payments based on no more than 8% of discretionary income above 250% of the poverty line.

“Taken together, these steps will ensure that all federal borrowers, accounting for over 90% of the outstanding student loan balances, receive substantial relief. … Public investment, not reliance on loans, should once again be the foundation of how we pay for higher education,” states the report.

Added Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, added: “The federal government must stop borrowers from continuing to drown in student debt by a system that has been inequitable and broken for decades. Abusive debt collection practices seize critical funds, such as Social Security and the Earned Income Tax Credit, and with no time limit on collection these practices can follow borrowers to the grave.”

Ashley Harrington, CRL’s federal advocacy director and senior counsel, spoke directly to the racial equity implications.

“For many, especially Black and Latino borrowers, repayment has been too onerous and too long, preventing them from achieving financial security even under normal circumstances,” noted Harrington. “Short-term payment suspension alone will not help struggling borrowers who have lost their jobs or who were already in default or serious delinquency before the public health crisis started.”

“To address our current recession and stimulate economic recovery, we urge President-elect Biden to immediately follow these simple steps and prevent further financial devastation for vulnerable borrowers and communities,” Harrington said. “The time to cancel student debt and provide student borrowers with significant relief is now.”

While student loan debt cancellation and the other proposed reforms would provide much-needed relief to borrowers, it would also bring the opportunity to redirect these dollars to better participate in the nation’s economy. Starting a business or transitioning from renters to homeowners are but two examples of ways to build wealth and financial security.

Other major research reports have also connected lengthy student debt and its restrictions to economic mobility and lifetime wealth-building. Research has established that student debt can prevent borrowers from buying homes, starting businesses, going to graduate school, and even starting families.

For example, a 2019 research report by Brandeis University’s Institute on Assets and Social Policy found that after 20 years of student loan repayments, the median debt of White borrowing students has been reduced by 94 percent— with almost half holding no student debt—whereas Black borrowers at the median still owe 95 percent of their cumulative borrowing total.

“It is clear that in the context of existing inequalities in wealth and assets by race/ethnicity, the privatized system of higher education financing serves to further exacerbate the racial wealth gap among young people,” states the Brandeis report. “It has saddled young borrowers of color, particularly Black borrowers, with debt that creates economic insecurity for decades and limits new wealth-generating opportunities such as homeownership.”

Despite noble contributions and achievements, there is no doubt that as a people we continue to be financially short-changed. Now as we approach a New Year and a new White House, systemic changes are both needed and possible.

Canceling student debt and reforming the repayment system are vital for Black borrowers and communities.

But targeted actions in other areas of concern are also necessary before this and future Black Americans can secure financial stability or build wealth. An even longer road map to relief – beyond student debt – must address other root causes of the racial wealth gap. Access to affordable credit – including safe and responsible mortgage loans- and an end to all forms of predatory lending are representative of these ‘other’ reforms.

Lifting the trillion-dollar debt of student loans is an important first step to financial equality.

Charlene Crowell is a senior fellow with the Center for Responsible Lending. She can be reached at charlene.crowell@responsiblelending.org.