This summer, the Federal Reserve Bank of New York released a study of student debt outcomes by borrowers’ race and ZIP code. The Fed study looked at a range of issues related to college attendance and debt. Free community college may help mitigate the impact of student loan debt and also reduce the cohort default rates.
The Fed research showed that students living in ZIP codes with a predominantly white population were most likely to attend college. They were also most likely to attend a four-year institution. Students living in ZIP codes with a predominantly black population were second-most likely to attend college. Students living in ZIP codes with a predominantly Hispanic population were least likely to attend college. But for those who did, they were most likely to attend community colleges.
Borrowers – those students who financed their educations using student loans -were most likely to hail from predominantly black neighborhoods. These students were nearly 10% more likely to have student debt at age 30 than students who grew up in predominantly white or predominantly Hispanic neighborhoods. They also had higher student loan balances. Black students who attended community colleges had loan balances that were 45% higher at age 30 than their white and Hispanic counterparts.Four-year degree students had student loan balances that were 23% higher at age 30 than white or Hispanic students of the same age.
Regardless of race, students who attended two-year colleges were nearly 50% more likely to default on their educational debt. Overall, Black and Hispanic borrowers were more likely to default on student loan debt by age 30.
Free community college may turn the tides on student loan debt
Free community college tuition is one way to reduce the likelihood that minority students will default on student loan debt. Reducing or eliminating borrowing among students who have recently entered post-secondary education programs can significantly reduce their debt burdens following graduation. This is also key to mitigating the effects of negative pay disparities among minorities in the workplace.
Defaulting on student loan debt can be an especially devastating financial event with unlimited impacts on the borrower. Unlike other credit defaults, a student loan default will persist indefinitely. It will impair a borrower’s ability to secure credit, like car and home loans. Mortgage payments typically require a lower monthly payment than leases do. Even though a mortgage may be more affordable, a student loan default will preclude minorities from ever purchasing a home.
The risk of default on student loans is most acute at community colleges. High quality student advising, careful cost management and reducing or eliminating the cost of attendance for low-income students is key to solving the student-loan-debt problem. Community colleges must ensure that minority students don’t leave a two-year institution saddled with debt. Further, they must work hard to build solid academic programs that translate into solid job prospects or transfer pathways to a four-year institution.
Free community college options would also reduce the cohort default rate for two-year students. The incoming administration may tie funding sanctions (or incentives) to a school’s student loan default characteristics.
A community college’s primary mission should be to lift people out of poverty through education. Satisfying that mission should not plunge the poorest of students into a virtual debtor’s prison for years or decades following graduation.
Photo Credit: Investment Zen, via Flickr