Does Student Loan Debt Contribute to Racial Wealth Gaps? A Decomposition Analysis

• Published date: 01 December 2019
• Author: Venoo Kakar,Gerald Eric Daniels,Olga Petrovska
• Date: 01 December 2019
• DOI: http://doi.org/10.1111/joca.12271

1920 THE JOURNAL OF CONSUMER AFFAIRS

VENOO KAKAR , GERALD ERIC DANIELS JR. , AND

OLGA PETROVSKA

Does Student Loan Debt Contribute to Racial Wealth

Gaps? A Decomposition Analysis

There is evidence of a large and growing student debt burden over the

last decade. Previous research has shown that the presence of student

debt jeopardized the short-term nancial wealth of U.S.households dur-

ing the Great Recession. We examine the effects of student loan use on

the wealth of U.S. households post-recession,using recent data from the

2013 and 2016 Survey of Consumer Finances. We nd that mean 2016

wealth for households with no outstanding student debt is more than

four times higher than households with student debt. We nd that liv-

ing in a household at the 15th, 30th, 50th, 70th, and 85th percentile of the

wealth distribution with student debt is associated with an 80%, 49%,

37%, 35%, and 36% wealth loss compared with a similar household

with no student debt. Our decomposition results suggest that student

loan use can explain between 3% and 7% of the Black-White wealth

gap across the wealth distribution but is insignicant in explaining the

Hispanic-White wealth gap.

In the United States, the student loan system was designed to serve as

an instrument for social mobility. However, over the last decade, there is

evidence of a large and growing student debt burden. A record one-in-ve

households in the United States now owe student loan debt relative to

one-in-ten in 1989, and 45% of this debt is owed by people 35 years

and younger (Fry 2012). Student loan debt became the largest source of

non-mortgage debt owed by U.S. households in 2010, (Bricker et al. 2017).

It amounts to an overwhelming $1.44 trillion in November 2018, almost

VenooKakar (vkakar@sfsu.edu) is an associate professor in the Department of Economics at Col-

lege of Business, San Francisco State University,Gerald Eric Daniels Jr. (gerald.daniels@howard.edu)

is an assistant professor in the Department of Economics at Howard University, and Olga Petrovska

(opetrovs@mail.sfsu.edu) is a graduate student of Economics at San Francisco State University. An

earlier version of this article was titled “Student Loan Debt and Financial Health of U.S. House-

holds.” Wewould like to thank Editor Ronald P. Hill, three anonymous referees, Christopher L. Foote,

Jeffrey P. Thompson, Philip Gundy for excellent research assistance, the Federal Reserve Bank of

Boston’s Research Department, International Association of Applied Econometrics 2018, Southern

Economic Association 2018, 2019 Federal Reserve System Community Development Research con-

ference participants for their insightful suggestions and the American Economic Association’sSummer

Economics Fellows Program. Any remaining errors are our own.

The Journal of Consumer Affairs, Winter 2019: 1920–1947

DOI: 10.1111/joca.12271

Copyright 2019 by The American Council on Consumer Interests

WINTER 2019 VOLUME 53, NUMBER 4 1921

ve times the amount in 2004 (Federal Reserve Bank report 2018).1During

the same time, there has been a signicant change in the nancing of

higher education—with state and local funding covering a smaller share,

and students and their families bearing a greater proportion of rising college

tuition costs through student loans (College Board 2018).2

Previous research has shown that the presence of student loan debt

jeopardized the short-term nancial health of U.S. households during the

period of the Great Recession, 2007–2009, a period of great economic

hardship using data from the Survey of Consumer Finances (SCF) (Elliott

and Nam 2013). Since the period of the Great Recession was unusual

because of adverse labor market and nancial market conditions, it is

necessary to examine this issue in different time periods.

This article provides a thorough analysis of the effects of student loan

use on household nancial health in the post-recession time period for

U.S. households. Specically, we look at three questions: (1) What are

the effects of student loan use on the nancial health (net worth) of U.S.

households during the post-recession period between 2013 and 2016? (2)

What role does student loan use play in explaining the Black-White and

Hispanic-White wealth gaps in the post-recession period? (3) To what

extent does student loan use contribute toward explaining the racial wealth

gaps across various socioeconomic groups?

To put our results into context, it is important to rst understand

the effects of student loan use on wealth (net worth) during the Great

Recession. Findings from Elliott and Nam (2013) suggested that median

2009 net worth for households with no outstanding student loan debt was

almost three times higher than for households with outstanding student

loan debt. Their ndings also suggest that living in a household at the

15th, 30th, and 50th percentile of net worth in 2007 with outstanding

student debt was associated with a 285%, 56%, and 54% loss in 2009 net

worth compared with a similar household with no student debt. This paper

goes beyond the previous study by examining the role of student loan use

in contributing to the racial wealth gap for different types of households

across the wealth distribution using a detailed decomposition analysis.

We found that mean 2013 net worth for households with no outstanding

student debt is three and a half times higher than for households with

1. By the time this article is published, the student loan debt would have crossed the $1.6 trillion

dollar mark, Student Loan Debt Clock.

2. While federal and state funding of higher education is contingent on tax revenues, it also

competes with other forms of public spending, and within education budgets such as preschool,

elementary, and secondary education spending.