New Metrics Needed to Highlight and Close Racial Disparities in Student Debt Outcomes by College

A college degree or credential is a crucial stepping-stone for upward economic mobility, and American colleges and universities play an essential role in building a more prosperous, equitable country. Yet far too many colleges, that have low graduation rates or that offer degrees with little value, routinely and disproportionately enroll students who end up struggling to repay or, worse, default on their student debt. Further, the debt burdens faced by students who attend these colleges fall most heavily on low-income students and underrepresented students of color, reinforcing long-time educational and economic inequities. As one tool to help close these gaps, policymakers must develop and adopt new student debt measures to better identify and incentivize these colleges to improve, and to better protect students if they do not.

Inequities throughout the education pipeline and systemic racism and its resulting wealth gaps hit Black students especially hard no matter where they enroll, but colleges that systemically offer little payoff for students, and produce egregiously bad loan outcomes, disproportionately enroll Black students. These factors help explain why Black students are more likely to need to borrow federal student loans, and more of them. Among bachelor’s degree graduates in the class of 2016, 85 percent of Black borrowers graduated with an average of $34,000 in student loan debt, higher borrowing rates and debt averages than for white, Latino, or Asian graduates. And when they leave college, they’re more likely to struggle to repay their debt: Nearly four in 10 Black students (38%) borrow and default on their loans within 12 years, compared to about one in 10 white students (12%).

Holding colleges accountable can improve loan outcomes, as the Cohort Default Rate (CDR) has done, in identifying colleges with high percentages of borrowers in default during a window of time. But CDRs have long needed strengthening due to well documented gaming by certain schools. Adding urgency is that fact that the COVID-19 loan payment pause renders CDRs far less useful for the next several years, as the measurement window overlaps with at least a year and a half when most borrowers were not required to make payments, and during which delinquent loans were reset to good standing. As a result, the current payment pause will result in very low CDRs, regardless of whether colleges set their students up for repayment success.

The good news is that we know how to strengthen CDRs, and there are additional metrics that can supplement them. In a recent report, we detailed three promising debt metrics that could complement and strengthen existing accountability metrics, and ultimately help move the needle on borrower success: debt-to-discretionary earnings ratios, earnings net of expected debt payments thresholds, and repayment rates.

While we believe low-income students and underrepresented students of color—particularly Black students—have the most to gain from federal accountability policies that guard against colleges that consistently produce poor outcomes, they also have the most to lose from poorly designed accountability systems that could adversely affect equitable college access. With those tradeoffs in mind, we offer several recommendations to policymakers to help mitigate unintentional impacts:

• Hold colleges to a minimum standard. Debt metrics should identify colleges with consistently adverse outcomes for students. Thresholds should be set to identify institutions well below the norm, while avoiding disruptive impacts on most colleges.
• Develop and consider using earnings net of debt payments. All debt metrics are likely to correlate with race and income, but some metrics are more influenced by factors external to colleges than others are. We believe that a metric that incorporates an earnings threshold is more likely to reward college level strategies that improve completion and credential quality, which can lift earnings above a minimum bar, without withdrawing opportunities from students.
• Pair multiple metrics together. Policymakers should consider ways to pair metrics that can provide multiple paths for colleges to demonstrate value. For example, the repayment rate could provide an initial filter that would allow institutions that have strong loan payment outcomes to pass the accountability standard, regardless of performance based on earnings metrics. This could be particularly helpful when colleges feel available earnings data do not accurately reflect the financial health of their students. Colleges would still need to pass CDR and existing eligibility standards as well.

As policymakers consider how to address longstanding student debt burdens, as well as the impacts of COVID-19, they should not overlook the role that strengthening college accountability with more transparency and better debt metrics can play in addressing adverse debt outcomes.

Congress should take steps to strengthen the CDR immediately, as well as direct the U.S. Department of Education to calculate and publish new debt metrics to inform how they can supplement existing accountability measures with additional standards. Further, as data become available through recent FAFSA changes, the Department should disaggregate loan data by college and by race and ethnicity to measure the severity of the student debt crisis, highlight the benefits and harm reduction associated with debt metrics, and mitigate unintended consequences.