​The bias inside the college debt system

In 1965, President Lyndon Johnson vowed that no student wishing to attend college would "be turned away because his family is poor."

Half a century later, a shift in the way college is funded and the declining fortunes of minorities and poor families since the recession have created a college-debt system that the left-leaning think tank Demos calls "deeply biased along class and racial lines."

Because college is increasingly financed by debt taken on by students, it's creating a system that's impacting different socio-economic communities in unique ways, Demos senior policy analyst Mark Huelsman writes in the report. Black, Latino and low-income students are not only taking on higher loan balances to finance their college educations, but they are more likely to drop out before receiving a degree, creating a worst-of-both worlds situation: student debt without a credential that will help earn higher income.

"Despite bipartisan rhetoric around closing attainment gaps among students of color and low-income students, we have created a system in which more underrepresented students take on debt and drop out with debt, thereby saddling communities of color and those with modest means with substantial disadvantages as they enter the workforce," Huelsman writes in the report.

To be sure, it's not only low-income and minority students that are taking on higher debt loads to finance college. The average graduate in 2014 left college with $33,000 in debt, making that class the most indebted ever. Adjusting for inflation, it's nearly double the average debt load for graduates two decades ago.

But black and low-income students are more likely to borrow to fund a bachelor's degree, Demos notes. About 63 percent of white students take on debt to pay for public university educations, compared with 81 percent of black students. Latino students borrow at about the same rate as white students, which could be due to cultural attitudes about debt and risk and school choice, the report noted.

That disparity in debt reliance may be no surprise, given that black families historically have earned less than white families. But the issue has grown worse in recent years, thanks to the impact of the recession, which widened the gap between black and white households.

Before the economic slowdown, white households had median net worth seven times higher than black households. In the years since the recession, that gap widened, with white families now having 13 times more wealth than black households, Demos noted.

At the same time, cuts in state support for higher education is pushing up tuition at public universities, which are asking students to take on a greater share of tuition costs. While higher-income and white families may have the income and assets to handle the surge, many low-income and minority students are less prepared to handle those demands.

The situation is even more dire for minority and low-income students who enroll in associate's degree programs, which are two-year degree programs often considered as a stepping stone to a bachelor's degree or a way to earn a workplace skill.

Fifty-seven percent of black associate's degree recipients take out student loans -- and take out $2,000 more in debt than white students -- compared with 38 percent of black students a decade ago.

The issues continue far beyond the college years, given that student debt can have a life-long impact on one's ability to save for a down payment on a house or buy a car. People with student debt are less likely to own a home than those without the burden, while their average retirement assets are less than half of the amount socked away by households without student loans.

Even worse off are poor and minority students who take out loans and then drop out of school. It's a rising problem, with Demos noting that about one-third of borrowers are dropping out, compared with one in five in 2001. Black borrowers are more likely to leave college without a degree than white borrowers, leaving them in an even more precarious position. Without higher income that comes from the result of a college degree, they may struggle to meet the monthly payments on their student debt.

"This explains how a law school student with six-figure debt can be in better financial shape than a dropout from an associate's degree or certificate program, and speaks to the need for targeted policy solutions aimed at those most likely to struggle to repay," the report noted.

Simplifying the system of federal financial aid to provide more benefits to those who need assistance could ameliorate the situation, as well as encouraging states to increase spending on public universities and to create policies that would help poor, working class and middle-class students to attend college without creating financial hardship, the report noted.