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

Abstract

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 financial wealth of U.S. households during 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 find that mean 2016 wealth for households with no outstanding student debt is more than four times higher than households with student debt. We find that living 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 insignificant in explaining the Hispanic‐White wealth gap.

Racial/ethnic differences in consumer financial capability: The role of financial education

“…Later investments refer to financial education received to accumulate financial knowledge. Environmental factors can be many but in this study, we focus on potential discrimination, following previous research on the wealth gap (e.g., Kakar et al, 2019). The literature of financial knowledge and behaviour shows that compared to Whites, minority groups demonstrated lower financial knowledge and fewer desirable financial behaviours, which may be caused by the above factors.…”

Differential Rates of Return and Racial Wealth Inequality

“…Where the first term is again the portion of the racial wealth gap explained by observed characteristics, and the second term is the unexplained portion of the racial wealth gap. In each decomposition we measure wealth with the inverse hyperbolic sine transformation of household networth (commonly used in the literature on wealth inequality, e.g., Thompson and Suarez, 2015;Kakar, Daniels, and Petrovska, 2019). The inverse hyperbolic sine transformation is similar to a logarithmic transformation, but admits negative values, therefore allowing the inclusion of households reporting negative networth.…”

The Impact of Debt-Servicing Burden on Household Expenditure in Nigeria: A Case of Ekiti State Senatorial Districts

“…A detailed review of contemporary literature x-rayed that only a few studies have examined the different aspects of household debt, household debt-servicing and their impact on household consumption (Chucherd, 2006;Dynan, 2012;Sommarat et al, 2020;Nakajima, 2020), government expenditures, inequality (Giraud & Grasselli, 2019;Kakar, Daniels & Petrovska, 2019), effectiveness of monetary policy instruments (Alpanda & Zubairy, 2018), growth (Checherita & Rother, 2010;Lombardi, Mohanty & Shim, 2017) and other economic outcomes (Maite & Santiago, 2015;Lombardi, Mohanty & Shim, 2017;Velez, Cominole & Bentz, 2018).…”

“…Focusing particularly on the post-recession period, Kakar, Daniels & Petrovska (2019) examined the impacts of student loan on household wealth using 2013 and 2016 data obtained from the US Survey of Consumer Finances. The results show that on average, households without outstanding student debt possess wealth four times greater than households with outstanding student loan.…”

“…Also, the study seeks to examine the applicability of the life-cycle hypothesis among households within the study area (Schularick & Shim, 2017). Notably, household debt and debt-servicing trigger inequality (Giruad & Grasseli, 2019;Kakar, Daniels & Petrovska, 2019), and as such it becomes harmful if debt overhangs. Thus, there is the need for ameliorative measures.…”