Ryan Gentzler is a Research Associate at the Early Childhood Education Institute at OU-Tulsa and a former OK Policy Research Fellow.
The Federal Reserve Bank of St. Louis recently issued a report that highlighted the effect of higher education on wealth protection during times of economic difficulty. The report found that white and Asian families headed by a four-year college graduate maintained their wealth better than their counterparts without a college degree, but black and Hispanic families headed by someone with a college degree did significantly worse than those without degrees, losing more of their wealth during the Great Recession.
Figure 1 shows these changes. The authors speculate that this is due, at least partially, to “job-market difficulties specific to Hispanic and black college graduates” and “financial decision-making” by those groups. The term “financial decision-making” as the authors use it, however, is deeply misleading, because it suggests that these minorities simply made bad choices about how to spend their money.
To the contrary, evidence shows that black and Hispanic borrowers who made essentially the same choices as their white and Asian peers – to go to college and invest in a home – nevertheless were targeted for bad loans by subprime lenders and left college with higher student debt, hampering their ability to protect their wealth in the first place. In sum, while the authors believe their analysis is about higher education, it is really about the ways in which financial institutions interact with different racial groups, putting minorities at a disadvantage at every turn.
Minorities have much higher debt compared to their income
According to the study, college-educated white and Asian families have a median net worth of over six times that of college-educated Hispanic families, and over 10 times that of college-educated black families, as well as enjoying much higher incomes. As Figure 2 shows, college-educated black and Hispanic families also tend to carry much higher debt than white and Asian families. The authors note that this puts a “severe squeeze on cash flow,” making it difficult to make ends meet.
The authors begin to get at the real problem when they point out that the average value of homes owned by Hispanic and black college grads was cut in half between 2007 and 2013, while the average value of homes owned by white college grads lost only a quarter of their value and homes owned by Asian college grads increased slightly. But these numbers, shown in Figure 3, tell only tell part of the story.
Racial bias in subprime lending
The origin of the financial crisis is found in the proliferation of subprime mortgages, which were high-risk, high interest home loans that borrowers could not repay when home prices plummeted between 2007 and 2008. Ironically, the most financially successful black and Hispanic families – those who most likely had college degrees but had been historically shut out of banking services – were the most likely to be given a subprime loan during the housing boom. An analysis of mortgage data from the height of the housing bubble in 2006, cited in the Atlantic, showed enormous disparities:
Relative to comparable white applicants, and controlling for geographic factors, blacks were 2.8 times more likely to be denied for a loan, and Latinos were two times more likely. When they were approved, blacks and Latinos were 2.4 times more likely to receive a subprime loan than white applicants. The higher up the income ladder you compare white applicants and minorities, the wider this subprime disparity grows.
It should come as no surprise that even years after the crisis, college graduate minority families lost so much of their wealth in the years between 2007 and 2013, or that they hold so much more debt than their white and Asian counterparts. Their biggest asset, their home, was likely to cost more and to lose more value during the housing crisis. This cannot be chalked up to “financial decision-making” by the borrowers; it is clearly a different institutional treatment of racial groups – one that has been the subject of several discrimination lawsuits across the country.
Disproportionate student debt
“Black and Hispanic families headed by someone with a college degree did significantly worse than those without degrees, losing more of their wealth during the Great Recession.”
Blocked at every turn
As the authors of the St. Louis Fed study note, “higher education alone cannot level the playing field” when it comes to wealth protection. But there are good reasons to believe that higher education was a serious disadvantage to the wealth protection of black and Hispanic families who were given subprime mortgages because of their financial success and who carried higher student loan debt long after graduation.
To begin to fix this, we must be clear about what causes well-educated minorities to fall behind. It is not “financial decision-making” that hampers their accumulation of wealth; it is a system-wide failure to treat racial groups equally. Instead of asking why higher education didn’t protect Hispanic and black wealth, we should be asking how to ensure that financial institutions don’t punish those who are striving the hardest to get ahead.