Blacks and Latinos Will Suffer When the Student Debt Bubble Bursts

college studentsWhen the housing bubble burst, the resulting foreclosure crisis was a disaster for black and Latino families, who lost 53 percent and 66 percent of their median household wealth, respectively, between 2005 and 2009.  As a result, the racial wealth gap is widening, with white households enjoying 18 times as much wealth as their Latino counterparts, and 20 times more than African-American households.

There is every indication that the bursting of the student debt bubble, like the housing bubble before it, is imminent.  And when it happens, it will send shockwaves throughout the financial markets. People of color will be especially vulnerable.

Although education is widely viewed as a way up and a way out for poor, working-and middle-class students, the prohibitive cost of college tuition has created a virtual debtors’ prison for many.  Loan defaults and delinquencies are on the rise in America, and are only expected to worsen.

A recent report from Moody’s Analytics says that tuition has doubled since 2000 — that’s a 10 percent increase every year — causing student debt to accelerate during the recession. In contrast, other types of consumer debt such as mortgages, credit cards and auto loans have decreased sharply. Outstanding student loans have increased 25 percent since 2008. Student debt now exceeds total credit card debt, and is likely to reach $1 trillion this year, with the average debt for a bachelor’s degree at $24,000.

To add to the problem, unemployment is high and there are no jobs for recent graduates. And in the lucrative for-profit college industry where students of color predominate at 54 percent, graduation rates are lower than traditional institutions of higher learning. So, students leave without the benefit of a degree, but with the debt burden just the same.

For blacks and Latinos — who suffer from lower pay and double the unemployment, and must assume larger debt loads to pay for school — the deck is stacked against them.  According to a Georgetown University study, blacks and Latinos earn less than whites, even with advanced degrees. Moreover, members of these groups who have earned a master’s degree earn less than whites with a bachelor’s. It is no wonder that their default rates are higher. In a 2007 survey, black students had a default rate five times higher than whites and nine times higher than Asians, with the Latino rate double that of whites and quadruple that of Asians.

This talk of student default goes far beyond dollars and statistics. These are human beings who are thrown into hopeless life situations because the tuition is too damn high. Recently I had the pleasure of reviewing the new film Default: The Student Loan Documentary. I appreciate the film’s clarity in spelling out the nature of this American crisis and its impact on ordinary people. Borrowers break down and cry in front of the camera as they reveal the amount of money they owe in student loans. Some were brought to financial ruin as the result of prohibitively high monthly loan payments, compounded by illness or some other setback. Others are unable to get married and start a family because their loan payments prohibit it. One has to take a step back and ask if this is really what America has become.

“The private loan industry, they don’t care about people,” said Carmen Berkley, who appeared in the film. Carmen, who is African-American, has $80,000 in student loan debt, in addition to $5,000 in credit card debt and thousands in medical debt due to an illness. “I told them, ‘Look I don’t make that much money. I make $34,000 a year. There’s no way I can spend 600 or 900 dollars a month just for loans.’ And they said, ‘Well there’s nothing we can do about it.’”

debt worryDefault touches on far more than the inability of college graduates to afford to repay their loans, and the financial ruin they face as they must choose between paying their rent, eating or paying off their mortgage-sized school debt. Although that heart-wrenching part of the story by itself is enough to warrant a documentary, the problem is even deeper, as the movie points out.

Ultimately, the student debt crisis is a product of the union of greed and corruption — the banking industry and the politicians they have purchased for the purpose of carrying their water. Colleges and universities do their part by hiking up tuition far in excess of inflation. Meanwhile, private lenders exploit financial realities where students can no longer work to pay their way through college, and federal loans no longer pay for most or all of a college education. Moreover, these lenders benefit from loan defaults, as the fees and penalties that rack up can double or triple the amount of the original loan.

David A. LoveMuch of this new financial crisis really speaks to the power of the lenders, who receive their money’s worth from their investment in Congress. There is a reason why student loans are the only type of debt that cannot be discharged in a bankruptcy. The banks paid for the laws that exempt such loans from fundamental consumer protections. Even gambling debts can be discharged in a bankruptcy, as is mentioned in Default.

And in the irony of all ironies, the banking institutions that were “too big to fail” enjoy their federal bailout funds. This, as they continue to extract additional profit from human suffering, whether by exploiting homeowners with predatory mortgages, or bilking students with predatory school loans.  These bailout recipients are making everyday people suffer, yet where is the bailout for the students?

David Love

Comments

  1. James Crowe says

    No doubt that student loans and the increasing costs of education should be addressed.in practical terms, but can someone explain to me why there was no mention of The Student Loan Overhaul bill passed by congress and signed into law in May 2010? Is this not relevant and is the video that is linked to now irrelevant? Lastly, does anyone know if the loans made prior to the Student Loan Overhaul bill of May 2010 can be renegotiated?

  2. Anarcissie says

    I don’t understand this article. The crisis in subprime mortgages, and the subsequent crises in the financial industry and the foreclosure epidemic, are important for three major reasons: they resulted in people being put out of their homes, they caused huge amounts of money and housing to effectively disappear, and they resulted in a deep depression in real estate prices. A defaulted student loan does none of these things: one will not lose one’s degree if one defaults; one does not live in one’s degree; a degree is worthless in the sense that it cannot be traded for anything. Massive defaults may cause a good deal of the debt to be reduced or canceled, thereby helping Blacks, Latinos, and anybody else who owes student loan money. The main danger is that the people will again be taxed to bail out the banks holding bad debt.

    • LA Crystal says

      There are several issues in the article which deserve to be addressed. It’s not absolutely true that a degree is worthless in the sense that it cannot be traded for anything. The unemployment rates are much higher for nongraduates than for college graduates and college grads usually earn much higher incomes. This is what motivates people to go to college, along with the potential to enter a field they might simply prefer.

      However, it is interesting that tuition costs have increased so drastically despite fairly low inflation overall. And, that’s not the only factor at play. As the author pointed out, the financial industry lobbied to have student loans exempted from discharge in the case of bankruptcy, so the overburdened by student loan debt do not have the same options of people who simply ran up credit cards for frivolous purposes – even gambling debt! So, they will default if they have to, such as when they cannot find a job in this economy, but that doesn’t let them ‘off the hook.’ Their credit will be ruined before they ever start a career. How easy will it be to get a job in a competitive market with that? Creditors can sue for money judgments and go after their bank accounts. It doesn’t just end with a write-off, necessarily.

      For these (typically) young people, they must be feeling somewhat betrayed. We’ve been telling our kids that an education is important (and it is! – our country needs an educated workforce) and worth taking those loans. Yet, because of the same financial industry predatory practices, the economy is not delivering those great jobs that were supposed to be there for them.

      What a freaking orchestrated mess. My heart goes out to the kids.

  3. in_awe says

    This is a multi-decade disaster in the making. The heavy burden of college debt will sharply alter the traditional economic profile of college graduates. The typical path of a college graduate for decades has been landing a job, renting an apartment, acquisition of material assets (furniture, sound systems, automobiles), travel and recreation/entertainment spending, followed by buying a house at some point.

    The monthly debt service on college loans will dramatically the timing and size of each one of those post-graduate activities. Our national economic reliance on the ever refreshing waves of consumers is being disrupted. The ripple affect will be profound as demand softens and purchases and life decisions are pushed farther out into the future. There will be a large timeline adjustment with a gap in underlying consumer demand that drives our economy. Housing has long been a major driver of economic well-being in the US, but now that the financial capacity of a person is consumed by student loans equal in many cases to a home mortgage home buying will be deferred along with all the related purchases. This represents a huge problem.

    The author blames banks and other student lenders while essentially giving a pass to the colleges and universities for their role in this debacle. What galls me most is the lack of any assigned culpability to the federal government in all this. Federal education policies, funding and research grants approval processes over 3-4 decades played a major role in the acceleration of expenses within higher education and increases in fixed overhead costs. Those costs were built into tuition and housing costs passed along to students who just adjusted upward their loan requests – typically federally underwritten. Don’t believe for a second that the feds taking over the student loan business will change things for the better. If anything there will be more special exemptions and corruption coming into this arena in the years ahead.

    As to the idea of a student bailout – count me in. I’m one of those guys who didn’t overextend on my mortgage or over leverage my house to buy toys. I played by all the rules, and paid to bailout out everyone who didn’t. Now, I all I have to do is figure out how long I’ll be paying for the $168,000 in undergraduate college expenses my daughter racked up…

Leave a Reply

Your email address will not be published. Required fields are marked *