Blacks and College Loans: A Cloudy Picture

Obama's new rules would mean skyrocketing rates for hundreds of thousands of African Americans.

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(The Root) -- When Congress left town on Thursday -- marking the start of its Fourth of July holiday -- the nation's elected officials left one piece of unfinished business especially critical to black America's financial health and well-being: Congress failed to reach a compromise on the best way to structure the interest rates that govern federal student loans available to both undergraduate and graduate students. As a result, those interest rates have jumped from 3.4 percent to 6.8 percent. That increase will boost the average cost of repaying a student loan by about $2,600, according to a congressional analysis.

Republicans wanted to tie student-loan interest rates to market conditions, while Democrats insisted that such an approach could easily push student-loan costs into an unaffordable and unsustainable zone. And as if the dizzying array of student-loan proposals offered by various members of Congress weren't enough, the White House urged Congress to approve a plan that would have set a fixed interest rate each year for federal student loans (meaning that the rate couldn't rise for the life of the loan) but would put no cap, or guaranteed limit, on how high interest rates could climb each year for new loans. The White House argued that its approach would offer some protection to students but would not contribute to the national debt.

Beyond the political infighting, the failure to reach a compromise marks particularly bad news for black America. Not only are black students most likely to borrow in order to finance college or graduate or professional school, but they also often borrow more, spend larger shares of their comparatively lower postgraduation incomes repaying debt and earn their degrees from institutions where loan defaults are more common.

A loan default can ruin an individual's credit profile, boosting the cost of borrowing for even essential and economy-boosting purchases such as a home. And for those who do manage to keep up with loan payments, higher interest rates can leave a household with less money to contribute to children's college funds as well as ordinary and retirement savings funds, and leave less money in household coffers each month.

Student-loan debt turns out to be one more thing contributing to the vast and growing gap between white and black economic health. Still doubt that student-loan interest rates are more than the fine print standing between eager students and their dreams? Consider this:

* Of the nearly 20 million Americans who attend college each year, about 65 percent of white students and a full 81 percent of their black peers borrow to cover school costs. Another 37 million Americans -- only some of whom actually graduated -- are responsible for repaying existing college loans.

* The differences don't end there. A full 27 percent of blacks who earned a bachelor's degree during the 2007-2008 school year borrowed $30,500 or more, compared with just 16 percent of white students, 14 percent of Latino graduates and 9 percent of their Asian peers, a College Board Study found (pdf, Table 5).

* A person with $30,000 of student-loan debt who refinances a 10-year loan, reducing the interest rate from 6.8 percent to 3 percent, could save $6,667.05 in interest payments. That's nearly $700 each year.

When Congress returns from recess on July 10, the Senate will consider a measure that would return federal student-loan interest rates to 3.8 percent for one year.

Janell Ross is a reporter in New York working on a book about race, economic inequality and the recession, due out next year.