Part II: Racial Wealth Disparities and the PLUS Loan “Fix”

Racial Wealth Disparities

How did the Parent PLUS program end up serving exactly who it was meant to for white families but not families of color, especially Black families? The reason is rooted in the racial wealth gap. If the racial income gap runs deep in this country, wealth disparity—or a family’s net worth including all assets and subtracting all liabilities—runs even deeper. Since the 1980s, the wealth of white families has grown at three times the rate of Black families.¹ If wealth accumulation continues at the same rate over the next 30 years, the wealth of white households will increase by $18,000 per year while for Black families it will only increase by $750 per year.² Families with less wealth must rely on debt to finance higher education, which in turn can inhibit wealth building.

There are many places where the story of the racial wealth gap begins; crucially, the founding of America allowed for state-sanctioned slavery of Africans. But for the purposes of this story, one that involves higher education and student debt, let us start with the piece of legislation that led to the dramatic expansion and establishment of the system of higher education we are familiar with today: the Serviceman’s Readjustment Act of 1944, or the G.I. Bill.

After World War II, millions of working-aged veterans returned to America and to a growing and rapidly changing economy. The passage of the G.I. Bill was meant to help these veterans secure low-cost loans to buy houses and pursue education to help them land jobs. Yet even though the bill is widely credited with greatly expanding America’s middle class, in implementation the benefits were disproportionately extended to white veterans over Black. This was true for the distribution of higher education benefits but was especially the case when it came to extending mortgages.

Home ownership is one of the driving forces of the racial wealth gap, and it is, in part, rooted in the G.I. Bill. Even though it was race neutral on its face—indeed, it was the first explicitly race neutral social federal legislation³—Black veterans were excluded from one of its most important components: the ability to buy a house. White veterans used the guaranteed housing loans to buy houses in fast growing suburbs.⁴ With that enormous growth in suburbia came the increase in home values in those communities, creating a plum asset for white families to fall back on in times of economic trouble. Black veterans, for the most part, were unable to use these housing benefits because mortgage lenders would not lend to those seeking to purchase homes in Black neighborhoods.⁵

That Black veterans were unable to access mortgages stems from the establishment of the Federal Housing Administration (FHA) in 1934, 10 years before the passage of the G.I. Bill. Through a practice known as “redlining,” the FHA and other actors were able to mark neighborhoods of color, especially Black neighborhoods, as bad credit risks, discouraging lending in these neighborhoods and preventing Black homebuyers from buying in white neighborhoods.⁶ For nearly 30 years, and even with the “race neutral” G.I. Bill on the books, only 2 percent of FHA loans went to families of color.⁷ Redlining was outlawed by 1968, but the damage was done. The same residential segregation patterns persist. According to the Dallas Federal Reserve, for example, families with low incomes and subprime credit scores in Dallas today align with the same neighborhoods that were once redlined.⁸ These areas on average have mortgage delinquency rates of over 30 percent.⁹

Years of discriminatory housing and lending policies, including the recent subprime mortgage lending crisis and the fallout from the Great Recession, have contributed to wide disparity in who owns a home. Today, 41 percent of Black households own their own homes, compared to 71 percent of white households.¹⁰ Even among Black households who do own homes, stark differences remain. Black homeowners are more likely than their white peers to be underwater with their mortgages or have negative equity.¹¹

Owning a home is a building block in the wealth equation for Americans. For many, having a home is an important asset on which to build equity and borrow against for crucial investments such as higher education. Black families cannot tap into home equity like white families can to help pay for higher education because they own homes at lesser rates; recently, they have seen the equity of their homes wiped away in the housing crisis.

Home ownership also can be a resource to draw on during retirement, and a means of transferring wealth to younger generations, in part through inheritance. Most Americans will not receive an inheritance, but this is especially the case for Black households. According to Demos, a public policy organization, while nearly a quarter of white families receive an inheritance, only 11 percent of Black families do.¹²

"Black families cannot tap into home equity like white families can to help pay for higher education because they own homes at lesser rates; recently, they have seen the equity of their homes wiped away in the housing crisis."

Housing is also critical because of its tie to K–12 funding structures. Black families often end up in residentially segregated neighborhoods with under-resourced schools. Because home values in those neighborhoods are often lower, less property tax revenue is available to fund the schools. Schools with less money lack the resources necessary to keep class sizes down, hire guidance counselors, and provide other resources necessary to prepare students to enroll in highly regarded colleges. And highly regarded colleges also have the most financial aid to give so that low-income families do not have to go into debt. Even though Brown v. Board of Education made segregation illegal in 1954, in the years that have followed, residential segregation and K–12 funding structures have returned America to de facto segregation.

While extending mortgages to veterans was the biggest part of the G.I. Bill and likely had the most influence on building America’s middle class, the higher education benefits in the bill were, in part, another driving factor of the wealth divide. In a growing and changing economy, Black veterans did not have access to the same postsecondary opportunities as white veterans.

Even though the bill was meant to open the doors of postsecondary education to all veterans, Black veterans hoping to take advantage of these benefits often faced Department of Veterans Affairs counselors that shunted them into postsecondary vocational education programs. Only 12 percent of Black veterans went on to college using G.I. Bill benefits, compared to 28 percent of white veterans.¹³ What is more, Black veterans in the South only had access to a segregated higher-education system with chronically underfunded HBCUs, many of which, according to journalist Edward Humes, were only allowed to provide veterans with limited courses of study.¹⁴

By 1947, three years after the passage of the G.I. Bill, increased enrollment had strained colleges and universities, inhibiting access. President Truman assembled a Commission on Higher Education to address broadening access and educating an increasingly diverse student body. Almost as a presage to America’s current state of higher education, Truman warned, “if the ladder of educational opportunity rises high at the doors of some youth and scarcely rises at the doors of others, while at the same time formal education is made a prerequisite to occupational and social advance, then education may become the means, not of eliminating race and class distinctions, but of deepening and solidifying them.”¹⁵

Since the end of World War II and the rapid growth of computing technologies and artificial intelligence, America’s economy changed to require new skill sets in the labor market. Higher education became increasingly necessary not just for veterans, but for many others, including women and minority students who previously did not attend higher education in large numbers.¹⁶ To help provide the funds necessary for students to access higher education, President Johnson signed the first Higher Education Act (HEA) into law in 1965, an expansion of the federal role in higher-education lending that had begun with the National Defense Education Act of 1958. This role has grown as the price of higher education has increased enormously and states have begun pulling back from funding higher education.

For years now, America’s system of higher education has not worked for students. Increasingly, higher education is a prerequisite for a well-paying job and in response, students have flooded the campuses of colleges and universities. In 1947, 2.3 million students were enrolled in higher education. Now, it is estimated that 20.9 million enroll.¹⁷ Meanwhile, price climbs faster than the rate of inflation, and states, particularly over the last two decades, have disinvested from their institutions of higher education. In 2017, for the first time ever, most states primarily relied on tuition revenue to fund their public colleges and universities.¹⁸ The Pell Grant, the federal government’s signature source of aid for low-income students, has not even come close to keeping pace to make up the difference. Instead, the government has turned to a debt-financed model and students are left to pick up the tab.

This debt-financed model has grown over time, just like the enrollments in higher education. In 1966, the first year students could borrow federal student loans under the Higher Education Act, only 330,000 students did so.¹⁹ But once the government sponsored the Student Loan Marketing Association (known as Sallie Mae) in 1972, the student loan portfolio grew significantly.²⁰ The passage of the Middle Income Student Assistance Act in 1978, which made loans available to all students regardless of income, and the establishment of PLUS loans in 1980 again increased the numbers of borrowers.²¹ But even by the late 1980s, student loans were still only a small fraction of the total debt held by 29- to 37-year-olds. However, currently and with the compounding interest and accumulation of debt over decades, higher education debt is approximately $1.4 trillion and counting, second only to mortgage debt.²² The squeeze of that debt is being felt particularly by Black students and families who struggle the most to repay.

It has been 70 years since the Truman commission, and Truman’s prediction has come true.

It is deeply important that students receive education beyond high school, and yet the ladder of educational opportunity—access to high-quality, affordable colleges and universities—stops short for many students, especially students of color. As higher education has become increasingly debt-financed, Black families have been caught flat-footed because debt is inextricably tied up with wealth and wealth is inextricably tied up in assets that, through a series of policy decisions, are more likely to be held by white families.

"It has been 70 years since the Truman commission, and Truman’s prediction has come true. It is deeply important that students receive education beyond high school, and yet the ladder of educational opportunity—access to high-quality, affordable colleges and universities—stops short for many students, especially students of color."

Residentially segregated K–12 systems frequently feed into under-resourced and low-quality higher education systems. Almost seven out of 10 undergraduates in 2011–12 attended college 30 miles or less from home, meaning college students are often place-bound and do not go far from where they grew up to attend college.²³ The higher education opportunities for low-income Black students who live in segregated areas likely amount to underfunded community colleges and public regional comprehensive four-year institutions and expensive for-profit institutions.

For years now, students have been feeling the sting of state disinvestment from public colleges and universities. For the institutions that serve Black students, the funding has always been unequal, with state disinvestment exacerbating the inequity. For example, after decades of court cases to try and solve unequal funding problems in its higher education system, Mississippi’s HBCUs received a $500 million settlement in 2002 that arguably does not go far enough to undo the damage of decades of constrained budgets.²⁴ In 2017 in Maryland, the courts sided with Black colleges that have been fighting the state for more than a decade. A judge in that case ruled that the state must establish new, unique, and high-demand programs at Maryland’s public HBCUs.²⁵ An Education Department spokesperson told the Chronicle of Higher Education in 2018 that six states have not proved that they have desegregated their higher education systems. These states are: Florida, Maryland, Ohio, Oklahoma, Pennsylvania, and Texas.²⁶ In total, these states account for 29 percent of Black undergraduate enrollments in the public sector nationwide.²⁷ HBCUs, many of them public, make up less than 5 percent of the total colleges in the U.S. but account for 17 percent of Black graduates.²⁸

In addition to the funding issues that drive prices up at the public colleges where students of color are likely to attend, enrollment in the for-profit sector also contributes to reliance on education debt and an inability to repay. Besides HBCUs, for-profit colleges were also disproportionately affected by the 2011 Parent PLUS loan policy changes. For-profit colleges prey on students of color; many saddle their students with debt in exchange for no degree or degrees with low labor-market returns. For-profit institutions draw Black youth to attend short-term programs with low returns by advertising these programs as a fast and direct path to the workforce and to making money.²⁹

The last part of the wealth equation, one that in today’s economy hinges on access to higher education, is the ability to secure a job with good wages that also comes with important asset-building benefits. Graduates of color are more likely to enter the labor market with student debt and face job discrimination that results in lower wages and less ability to repay those debts. According to Demos, compared to white workers, Black workers are often paid less, hold jobs that fail to provide benefits and protections such as retirement and employer-based healthcare, and experience higher unemployment rates.³⁰

Among the college educated, in part due to an inability to accumulate and transfer wealth through generations and labor-market discrimination, racial economic inequality is at its greatest.³¹ Black male college graduates, for example, make approximately 75 percent of the wages of white male college graduates.³²

Just as higher education has shifted the financial burden to students and families paying the majority of the associated costs, so has the shift from defined-benefit pensions to employer-sponsored plans shifted the burden to workers to save and fund their own retirements. This is leading to a growing retirement crisis for Americans, but more for Black employees than white. According to Nari Rhee from the National Institute of Retirement Security, three out of every five white employees works for an employer that sponsors a retirement plan, whereas only approximately half of Black employees do.³³ Even when offered participation in a plan, lower-income groups either cannot contribute or only contribute small amounts that they often withdraw with enormous penalty, to cover financial emergencies.³⁴

"Among the college educated, in part due to an inability to accumulate and transfer wealth through generations and labor-market discrimination, racial economic inequality is at its greatest."

Those unable to save for retirement will be fully reliant on Social Security and other public assistance benefits. Approximately one third of Black single seniors rely entirely on Social Security in retirement, with an average benefit of $1,800 a month in 2011.³⁵ higher-education debt is particularly worrisome for low-income parents who are not far from retirement and who will likely rely on Social Security benefits. The government can and will garnish Social Security payments—a modest sum that leaves seniors on the edge of poverty—in order to collect on delinquent Parent PLUS loans. According to a Government Accountability Office report, in fiscal year 2015, approximately 7,339 Parent PLUS borrowers ages 65 and older were currently in default and experiencing government collection methods such as Social Security offsets and seizure of tax refunds.³⁶ In 2005, it was only 2,302 borrowers. That is a 219 percent increase over 10 years.³⁷