Out and About: Debt and the racial wealth gap

By Audrey Perrott

In June, this writer attended a presentation on Debt: When It Helps, When It Hurts, What It Could Do to Build Household Wealth. The hybrid in-person/virtual event, put on by the Federal Reserve Bank of New York, the Federal Reserve Bank of St. Louis, and the Aspen Institute Financial Security Program, covered the role policymakers, philanthropists and investors can play in improving access to capital as a tool for building long-term stability, including through access to loans for higher education, establishing or expanding a small business, or purchasing a home.

Johanna Smith-Ramani, managing director of the Aspen Institute Financial Security Program (FSP), kicked off the event by sharing some of the findings from the FSP’s research report Disparities in Debt: Why Debt Is a Driver in the Racial Wealth Gap. She noted that although there are countless anti-discrimination laws and constitutional guarantees of equality, the racial wealth gap is pervasive and growing. Most analyses of the racial wealth gap, however, do not take into consideration the role that debt plays in widening the gap. Many Blacks and Latinos have negative net worth.

Not all debt is bad, but some types are debilitating. What is in someone’s “debt stack” determines whether it is helping them to leverage wealth or holding them back. Credit card debt and student loan debt sit squarely in the very low wealth category. Asset-producing debt, such as mortgages, help build net worth over time. Smith-Ramani says our society is on the wrong trajectory for promoting wealth accumulation. Thirteen million households are experiencing negative net worth, with Black families significantly over-represented in that category. A white family is more likely to have a mortgage and other property-related loans, while a Black family is more likely to have student loans.

In a fireside chat with Mae Watson Grote, founder and chief executive officer of Change Machine, subject matter experts Lynette Khalfani-Cox, founder of The Money Coach, and Frederick F. Wherry, professor of sociology and vice-dean of diversity and inclusion at Princeton University and founding director of Debt and Dignity Network, weighed in.

Khalfani-Cox said that, for her, the Black student loan borrower trend resonates personally: After paying off $100,000 in credit card debt (and writing Zero Debt: The Ultimate Guide to Financial Freedom), she then spent a decade tackling $40,000 of student loan debt after earning her master’s degree at the University of Southern California. She indicated that we need to frame the conversation around types of debt: Some are harmful to financial goals, and others (like mortgages) are prudent ways to use debt to build wealth. (Forty-five percent of Blacks own their primary residence, compared to 73% of whites.) She also discussed the “Black tax”—an expectation in Black families that those who have achieved must help other family members. That expectation saps wealth creation, especially if multiple family members have limited incomes.

Wherry talked about the “Black tax,” too, explaining that his mother taps the “Bank of Fred” and other familial “banks.” He cautioned that if you are doing relatively well and have a lot of people in your network who need assistance, you will have less disposable income to put toward investments, hindering the ability to build wealth. He also raised a red flag about student loans, noting that Black and Latino graduates are more likely to have to take out student loans due to a lack of family inter-generational wealth, and they are more likely to be underemployed, even after graduation—both contributing to a wider wealth gap.

The panelists were asked how the “curb-cut effect” could be leveraged on the debt question (the term is used for laws and programs designed to benefit vulnerable groups, such as disability laws, that, in turn, benefit others—in the case of curb cuts, parents with strollers, cyclists, delivery people, etc.). They also were asked what questions they would pose to policymakers and product innovators who are trying to achieve change.

Khalfani-Cox advised innovators to consider if what you are doing is financially inclusionary or exclusionary. “If you are not helping, you are hurting.”

Wherry suggested innovators closely monitor inequality in the ways consumers are experiencing their financial products. If specific communities are having negative results, he said, it does not mean they don’t understand the product—it means that the product is not well designed for that population.

The day included panels of innovators and capital investors, who discussed their solutions for addressing debt and the wealth gap. The takeaways from the event were that the racial wealth gap is widening, and that there is a dire need for inclusionary policies, innovative financial products and services, and capital investment to address the problem.