Regulating Student Loans to Promote Racial Equity

Student loan debt currently burdens more than 45 million Americans who owe a total of $1.7 trillion. Although President Joseph R. Biden has extended the pause on federal student loan repayments through September 2021—placing millions of borrowers in temporary forbearance—it remains unclear whether the President will proceed with much-anticipated plans for broad student debt cancellation.

Higher education financing has been debated among policymakers in recent years, with some officials proposing tuition-free or reduced-tuition college and others recommending student loan forgiveness. Nonetheless, many scholars and experts agree that any sound policy proposal must account for the disproportionate effects of individual student loan financing on borrowers of color.

Many critics of broad student loan forgiveness, including President Biden, argue that canceling debt for all Americans would benefit white borrowers more than those of color because white students hold the majority of American student loan debt. Proponents of broad forgiveness, however, point to a lack of nuance in such critiques. Although a greater number of white students have loan debt, a greater percentage of students of color would benefit from cancellation. Black students and students attending for-profit institutions—most of whom are students of color—face disproportionate challenges as they tend to take on student loan debt at higher amounts and experience greater difficulty in paying off such debt.

The Consumer Financial Protection Bureau (CFPB) found that Black and Latinx students are more likely than white students to attend schools with higher cohort default rates (CDRs)—a measure of how often particular groups of borrowers default on loans. Not only are students of color disproportionately concentrated in schools with higher CDRs, but individual default rates also remain higher for Black and Latinx student loan borrowers. One report based on 2017 federal data revealed that 48.7 percent of Black borrowers and 34.7 percent of Latinx borrowers who entered college in 2014 defaulted on their student loans by 2016, compared to 21.4 percent of white borrowers. For Black and Latinx borrowers, student loan debt can undermine the benefits that higher education is supposed to provide.

Following the passage of the Higher Education Act of 1965 (HEA), which established the existing student-aid framework, individual student borrowing became the centerpiece of higher education financing. Although the drafters of the HEA intended to increase access to higher education, the resulting student loan regime has perpetuated socioeconomic and racial inequities. Title IV of the HEA grants the federal government regulatory oversight of student loan servicers but does not include provisions prohibiting discrimination in loan servicing.

The Equal Credit Opportunity Act (ECOA) forbids creditors from discriminating against applicants in credit transactions. ECOA further prohibits creditor practices that have disparate impacts on any protected class of borrowers, even if such practices are facially neutral. Despite ECOA’s prohibitions, however, the CFPB has failed to provide rigorous oversight to ensure more equitable outcomes for student loan borrowers of color. The absence of such oversight is a call to action for regulators to implement and enforce affirmative safeguards to protect Black and Latinx borrowers.

This Saturday Seminar highlights scholars’ proposals for regulating federal student loans to address the disproportionate effects of the student debt crisis on borrowers of color.

• In an article for the Consumer Finance Law Quarterly Report, Katherine Welbeck of the Student Borrower Protection Center explains how student loan servicers contribute to the repayment gap between Black and Latinx borrowers and other borrowers. Emerging research suggests that about 11 percent of the default payment gap stems from student loan servicers failing to uphold their responsibility of helping borrowers access a range of protections to mitigate the economic consequences of student debt. Welbeck calls on policymakers to establish a data collection model to increase transparency and provide further tools for officials and litigants. Welbeck also recommends several legal approaches to remedy the disparate outcomes in student loan servicing.
• Suzanne Kahn of the Roosevelt Institute, Mark Huelsman of the Hope Center for College, Community and Justice, and Jen Mishory of The Century Foundation explain in a jointly issued report how race-neutral policy assumptions by U.S. policymakers lead to a U.S. education system in which debt financing in higher education contributes to racial wealth inequalities. Student loans are “both more necessary and riskier for Black families than for white families,” Kahn, Huelsman, and Mishory find. They urge policymakers to reduce college tuition, address segregation and racial disparities in enrollment and completion rates, take action against predatory for-profit schools, and cancel at least some student debt. They note, however, that the higher education system cannot be equitable as long as access to higher education requires large individual loans.
• In an article in the Harvard Civil Rights-Civil Liberties Law Review, Dalié Jiménez of the University of California, Irvine School of Law and Jonathan D. Glater of the University of California, Los Angeles School of Law describe the student debt crisis as a civil rights issue with disproportionate impacts on Black and Latinx borrowers. Jiménez and Glater propose race-conscious solutions, such as reparations for slavery or “baby bonds” (publicly funded trusts given to children at birth). Because such a remedy would likely encounter hostility in the Supreme Court, however, Jiménez and Glater also suggest race-neutral reforms such as loan forgiveness and heightened consumer protection measures.
• The student debt crisis has undermined an entire generation’s “American Dream,” argues Seth Frotman of the Student Borrower Protection Center in an article for the Utah Law Review. He claims that the increased financial burden placed upon African American and Latinx students reveals that higher education is failing in its role as a “great equalizer.” According to Frotman, the student debt crisis is exacerbated by a lack of government oversight, which allows student loan companies to abuse borrowers through illegal practices. He also criticizes the Department of Education’s ability to self-police its contracting practices. To protect the futures of student loan borrowers, Frotman calls for increased regulation at both the state and federal levels.
• In a working paper issued by the UCLA Civil Rights Project, Brian Pusser and Matt Ericson of the Curry School of Education and Human Development explore how the proposed PROSPER Act would affect Black, Hispanic, American Indian, and low-income students attending for-profit colleges. House Republicans introduced the PROSPER Act in 2017 with the goal of reforming higher education. Pusser and Ericson argue, however, that the bill would harm underrepresented students by deregulating for-profit colleges and eliminating certain loan forgiveness programs. Pusser and Ericson instead recommend increased regulation of the for-profit higher education system and suggest Congress redirects federal investments towards nonprofit colleges.
• In a recent case study, the Student Borrower Protection Center highlights the negative effects of income share agreements (ISAs) on borrowers of color. ISAs, through which students pledge a portion of their future income in exchange for tuition dollars, perpetuate “educational redlining.” ISAs disproportionately harm students of color because lenders price them based on the school and program a student chooses to attend—two factors that proxy for a student’s race. Although the higher education financing industry insists that ISAs fall outside of traditional student loan oversight, the Student Borrower Protection Center argues that the agreements resemble student loans to the point that standard regulation and enforcement should apply.