April 22, 2019
A recent article in The Wall Street Journal caught my eye, Tom. In it, the authors note that while historically Black colleges and universities (“HBCUs”) have helped millions of Black students achieve financial prosperity, they may now be hindering some of those they seek to help due to high student debt loads. This morning, I want to walk our listeners through what is happening, why it is happening, and what can be done to avoid putting themselves or their family members in this situation.
What they uncovered is a really big deal, Tom. Looking at the Department of Education data from 2017, the article’s authors found that while America’s 82 four-year HBCUs make up just 5% of four-year institutions, they account for more than half of the 100 schools with the lowest three-year student-loan repayment rates. Perhaps more importantly, they found HBCU alumni graduate with about $29,000 in mean federal loan debt. This number is 32% higher than graduates of other public and nonprofit four-year schools. Additionally, most HBCU grads are unable to pay down any of their original loan balance in the first few years out of school. This means that during their initial working years, they continue to accrue interest on these loans, adding to their burden.
It all comes down to wealth. Black families have the least household wealth among racial groups in the U.S., according to Federal Reserve data. Black Americans have lower average incomes and a smaller percentage own homes compared to the broader population. This resource gap pushes Black students to turn to student loans to finance their higher education costs. Add to this the fact that tuition increases have outstripped inflation – let alone wage growth – over the past 3 decades, amplifying the problem. Finally, many HBCUs have fewer resources and smaller endowments, limiting their ability to provide financial relief to low-income students.
It is not. Nearly half of Black student loan borrowers who were freshmen at any college in the 2003-2004 school year ended up defaulting on a student loan within a year of the repayment period beginning. That is twice the rate of white borrowers. The article notes research by a Columbia University professor found that even controlling for socioeconomic status, blacks have bigger debt burdens than whites. Again, this is compounded by wealth disparities, especially the wage gap. According to the Economic Policy Institute, Black college graduates between ages 21 and 24 earned nearly 17% less per hour, on average, than white graduates. So not only do Black graduates have higher debt loads, after graduation they often have fewer resources with which to pay them.
From the university perspective, many HBCUs are already working to address the issue. Some are reducing tuition rates. Others are limiting the amount students can borrow for non-tuition expenses like housing or personal expenses. And many HBCUs are shifting their course offerings and curriculum to focus on higher paying majors. These are important steps. More broadly, universities should work to reduce non-instructional expenses for students. In terms of policy changes, the amount available to low-income students through the federal Pell grant program could be raised to reflect tuition increases. Expanding employer tuition assistance tax incentives would also help college graduates when they entered the workforce.
For families, there are long term and short term solutions. If you are preparing for your children to go to college and you have some time, the best thing you can do is to start saving now. The two most common vehicles are 529 plans and Coverdell Education Savings Accounts. The 529 plans are offered in various states and typically give you a menu of investment options to choose from. Funds can be withdrawn tax-free only for qualified education expenses such as tuition, books, and room and board. Coverdell Education Savings Accounts also allow your investments to grow tax-free, as long as they are used for qualified education expenses. Coverdell accounts are limited to a maximum of $2,000 per year, while 529 plans generally have higher contribution limits.
In the short term, if you or your kids are taking out loans, you want to keep the amount as small as possible. This means not adding onto your loan amount for extras like meals or housing if at all possible. Living a spartan lifestyle while in school will mean you are not burdened by excessive loans after. And once you do graduate, take advantage of income-based repayment plans on federal loans. This will limit your annual payments to 10 percent of your total income, giving you more breathing room for living expenses, and to save and invest.
This information in the Financial Tips section is provided for educational purposes only and is not tax, legal, financial planning or investment advice. You should consult a tax professional. Neither the information nor any opinion expressed in this section constitutes an offer to buy or sell any securities or advisory products. The information provided is general and is not information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. You should not regard this information as a substitute for the exercise of your own judgment. Investing involves risk.