The Impact of Student Loans on Black Wealth

*Editor’s Note: This week we are publishing some of our favorite BP articles. We continue with this essay by historian Devin Fergus as part of our forum on Race, Property, and Economic History.

President Barack Obama jokes with participants in the Roosevelt Room of the White House before making a statement on student loans in the Rose Garden in 2013. (Photo: Pete Souza, Wikimedia Commons)

2017 marks the 10th anniversary of the largest financial aid corruption scandal in U.S. history. At the heart of the scandal was Student Loan Xpress, an upstart company whose brief history in the student loan origination business included a track record of poor customer service, high-priced fees (or at least not providing $0 or reduced fees), and high rates of student defaults.

Despite such markers of mediocrity for five years running, Student Loan Xpress was nestled atop the University of Texas’s list of preferred student lenders in 2007. For UT Austin’s financial aid office, loan performance or quality of the student loan product was, in the personal handwritten notes of another UT preferred lender, “the least important factor [original emphasis].” Rather, what Dr. Lawrence Burt, UT Austin’s financial services director and his financial aid office cared most about was the quid pro quo, which came by way of offers of company stock, exclusive resort stays, birthday parties for family members, tickets to sporting events, and bottomless bottles of wine and tequila, apparently Burt’s favorite.  In effect, students were left to pick up the tab for Burt’s boozing.

In exchange, Burt and his team steered students to Student Loan Xpress and other preferred lenders who provided these inducements. Because 90 percent of all loans taken out by students or their parents came from this list, making the list was critical for lenders that wished to increase their market share of loans—an $85 billion a year industry by 2007.

While the Texas scandal may be the best known, these inducements appeared more the rule than the exception. As many as 500 colleges were potentially involved as well. Every school imaginable was implicated, from those in Maine to Hawaii, from for-profit colleges and elite private schools to regional and flagship state universitiesLegal counsel for the National Association of Student Financial Aid Administrators defended the practice with an everyone-does-it-defense. It was “perfectly acceptable” at the time for a college to accept several thousand dollars from a lender for a golf tournament or some similar benefit, NAFA attorney Sheldon E. Steinbach insisted to reporters. “Now there isn’t a school in the country that I know of that would not accept that kind of gift,” he added. In exchange for gifts, lenders were often added or moved up on the preferred list of student lenders.

Nor was it the act of a rogue lender. The eight largest student lenders—Sallie Mae, College Loan Corporation, and Nelnet as well as the usual too-big-to-fail suspects Bank of America, Chase, Citibank, Wachovia, and Wells Fargo—engaged in providing inducements of one kind or another. Such quid pro quos were both ubiquitous and illegal. Compensation, benefits, and favors offered by lenders violated Section 435(d)(5) of the Higher Education Act, which prohibited student lenders from offering monetary or in-kind rewards to school officials for preferential treatment in the Federal Family Education Loans.

Launching the first investigation in 2007, New York’s attorney general Andrew Cuomo spoke of the “unknowable harm” resulting from sweetheart deals between lenders and schools’ financial aid administrators. Similarly, Sen. Ted Kennedy (D-MA) who chaired a subsequent Congressional investigation, feared it was an “impossible task” to know how much such lawbreaking cost student borrowers and taxpayers, since the federal government guaranteed partial payments for any student loan defaults.

They were right. The downstream consequences of the scandal are still with us, and especially with the borrowers.

The Spring 2017 Graduation Ceremony at Florida A&M University. (Photo: FAMU News)

Given that it takes about 21 years for the average borrower to pay off a loan, we are—some 10 years later—only midway through this financial fallout. And though the federally insured private student loan program ended in 2010, borrowers are still paying off those loans. As I discuss in my forthcoming book Land of the Fee, that’s not simply because the average borrower takes two decades to pay off her or his loan or the reality that when market setters like Sallie Mae or Citibank offer poor credit products, it incentivizes even scrupulous lenders to charge higher rates and fees. There’s also a hidden “hangover effect.” Higher-price student loans may linger over the life of a student borrower by lowering her/his debt-to-income ratio—thereby dragging down one’s credit score which results in being charged higher interest rates on credit cards or car notes. When it comes to wealth building, this hangover effect means higher rates and fees on a home mortgage or potentially delaying homeownership for years. Indeed, there is a high correlation among a college education, student loans and the delay in a home purchase. Bottom line: student loans may be far more costly than their advertised sticker price. Or, bottom line, thanks to the hidden hangover effect of student loans, have increasingly made the college campus less a site of upward mobility than of indebtedness.

It’s also reasonable to assume the largest scandal in financial aid history likely hit Black students the hardest. Blacks are more likely to borrow compared with other racial groups and borrow higher amounts. According to a recent report from Prosperity NowThe Road to Zero Wealth: How the Racial Wealth Divide is Hollowing Out America’s Middle Class, 90 percent of Black students took on student debt to finance college compared with just 65 percent by whites and 71 percent overall.

And as previous studies by Demos and the College Board indicate, Blacks also have higher student debt burdens—burdens that also delay Black homeownership among Black college graduates compared with non-Black graduates, 56 percent to 46 percent. Among all borrowers, Black women tend to suffer most: They’re the only demographic that owes more than they earn one year out from graduating.

Postponing homeownership is partly because higher student loan debt increases Black borrowers’ debt-to-income ratio, which drag down their credit scores and make it more expensive to take out mortgages. With higher student loan debt, one is charged higher rates and additional fees for a credit card, auto loan, or even renting an apartment—anything that takes into account one’s credit score. Because homeownership is the primary driver of asset accumulation in America, this delay in homeownership means Blacks are delaying building equity, resulting in widening the racial wealth gap even further. And this threatens to leave taxpayers paying the bill for badly serviced and faulty student loan products.

Because these costlier federally guaranteed student loans increased borrowers’ odds for defaulting, it meant taxpayers ultimately pay more. Why has this corrupt and corrosive system survived? For that we can thank moneyed interests whose successful lobbying and financial contributions to lawmakers would shield the illegal inducement practices from greater enforcement and legislative oversight.

With a congressional tax proposal that will eliminate the student loan interest deduction and disproportionately harm African Americans, who tend to have higher student loan balances, in addition to Trump’s rolling back regulations faster and to a greater degree than any of his predecessors, our legislative and executive branches promise to make the country’s future look remarkably like its recent past. This “future past” will again prove to be defined by less policing of student loan lenders, thus burying even higher numbers of Blacks—as well as Latinxs and women—deeper in debt.

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Devin Fergus

Devin Fergus is the Arvarh E. Strickland Distinguished Professor of History and Black Studies at the University of Missouri. He is the author of Land of the Fee (Oxford University Press, 2018), which explores the hidden costs of rising financial fees at home, school, work, and transportation on wealth and mobility in modern America. His current research project examines white-collar crime and the racial wealth gap. Follow her on Twitter @devin_fergus.