Student Loans: Subprime Mortgages on Human Lives

Higher education, as almost every American knows, is the road to a better life: Better jobs, higher income, more opportunities for subsequent generations. Therefore, higher education is an asset- much like a home- that will appreciate in value during the owner's lifetime and pass wealth on to the next generation. Borrowing to acquire an appreciating asset is no problem, right?
But wait...isn't that what happened with subprime mortgages? Things worked out as expected for some people, but for lots of others the yellow brick road to a better life led to downward rather than to upward mobility.
There is something else: the people for whom things worked out badly were not randomly distributed. Rather, minorities and low-wage workers were at ground zero of the eventual economic implosion. Burdened by compounding handicaps in their ability to acquire the assets that would help them and their children achieve better lives, they were forced to take more financial risks to get that first foot on the ladder to success. The rungs on their particular ladder, however, had been sawed through. Many of them fell.
And so we come to student loans. Emerging racial and economic patterns in student loan indebtedness could best be summed up by the old Billie Holiday song: "Them as got shall get/them as not shall lose".
Minority students and low-income students have higher rates of loan indebtedness overall, and are more likely to have taken on less advantageous private loans as well as public loans. Unlike federally-guaranteed loans, private loans cannot be consolidated, forgiven, or mitigated by public service: they are the subprime sector of the student loan industry. Overall borrowing, including both public and private loans, is also higher for low-income and minority students .
These inequalities are increasing. Why? Minority and low income families with fewer assets were hit hard by the current economic meltdown and are decreasingly able to help with college expenses. Competition for part-time jobs has made it harder for students to find part-time work.
Institutional decisionmaking plays a part: despite rhetoric about "diversity" in higher education, institutional grants have increasingly been made on the basis of merit rather than need. But merit ought to be rewarded, right? Too often in the American system of higher education, "merit" means "value-added by intensive parental investment" in SAT tutors, private education or residence in well-funded public school districts with extensive menus of AP courses and extracurricular activities.
Class- and race-based disparities in student loan borrowing are likely to produce cumulative disadvantage that reduce the life-chances of borrowers and of their children. Want to buy a home or car on credit? High debt to income ratios lower credit scores and raise interest rates. Having trouble finding a job that pays well, perhaps because wages for African-Americans remain lower than those for whites? Your loans default and your credit is ruined, further reducing your chances of advancement.
Played out over time, this pattern has even more in common with that of mortgages. Say family A pays cash for a Jim's college education. This amounts to a very large cash gift. It is as if those parents purchased a large, expensive home for a child. Over time, the house could appreciate, but even if it did not the money that would have been spent on mortgage payments can be invested, adding to the Jim's wealth.
Now, consider Mindy, who lives in family B. Mindy's family is unable to contribute to her education, and she borrows. Over time, her earnings are reduced by loan repayments: that is money that cannot be invested and that will not increase her family's wealth. If Mindy and Jim get jobs that pay equally, Jim will still be better off and his situation will become still better over time. If both have employment problems, then difficulties repaying loans will make Mindy's situation worse, but will not implicate Jim's.
As the subprime mortgage crisis demonstrates, the probabilities of being Jim or Mindy are not evenly distributed. The probability of being Jim is much higher if one is white and from a higher-income family. The probability of being Mindy is much higher if one is from a low-income or minority family. And one probability is nearly perfect: these differential patterns of student loan indebtedness will exacerbate rather than diminish overall patterns of social inequality over time.

For an excellent analysis of this topic, see:

http://www.educationsector.org/analysis/analysis_show.htm?doc_id=964333