Is Racism the Reason Why HBCUs Have to Pay More for Loans Than Other Schools?

Illustration for article titled Is Racism the Reason Why HBCUs Have to Pay More for Loans Than Other Schools?
Photo: Photo by Alex Wong (Getty Images)

If you want to see how systemic—and endemic—racism in the U.S., follow the money.

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You’d see the racial wealth gap—a phenomenon that has only gotten worse, even as unemployment rates for black Americans dip. You’ll see predatory loans, which disproportionately affect people of color (and which helped fuel the housing crisis). You’ll also see that the student debt crisis disproportionately affects black grads: four years after receiving their bachelor’s degrees, black students on average incur twice the amount of loan debt than their peers.

Now, a new study coming out from the Journal of Financial Economics has found another way race affects finances and wealth—this time, by looking at institutions. Namely, how much historically black colleges and universities have to pay to take on debt.

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As the Atlantic reports, taking on debt—specifically bond debt—is a way for schools to get funds for new buildings and repairs as public funding dwindles. Not only do HBCUs typically have smaller endowments than their primarily white counterparts (PWIs), but they get most of their revenue from state and federal funding.

With many states cutting deeply into their higher-ed budgets, that leaves schools needing to take on debt to keep up their campuses.

The Atlantic explains the process:

There are a couple of steps colleges have to go through to issue bond debt. First, they have to find a bank to buy the debt. The bank will then sell the debt to public investors. The banks are the gatekeepers, and they’re essentially signing off on the fact that the loan isn’t a scam. But the banks don’t do this for free. They typically sell the debt at a slight markup as compensation for expenses and management fees—and that ultimately falls back on the college to pay off.

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The study, which looked at 23 years of bond issues among 965 four-year, not-for-profit colleges, found that black institutions pay more to banks issue debt.

For every $100 raised, the typical PWI has to pay 81 cents back to the bank. Meanwhile, the typical HBCU would have to pay 92 cents back (another way to phrase this is that HBCU’s have an 11 point difference). Consider that these bond issuances are often in the 8 digit range, that cost quickly adds up.

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And here’s where the study gets really interesting: researchers controlled for the kinds of bonds issued, the quality of the banks issuing the bond, and institutional credit scores. In these cases, they found the same thing: a 16 point difference in how much more HBCU’s had to pay back to banks than white collegiate institutions.

That would be damning enough, but researchers took it another step further, testing out whether regions with long, violent histories of racial segregation would show an even larger difference.

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They did.

From The Atlantic:

“If racial animus is the primary reason why HBCU-issued bonds are harder to place,” the researchers wrote, “then these frictions should be magnified in states where anti-Black racial resentment is most severe.” And sure enough, by separating out black colleges in Alabama, Mississippi, and Louisiana, the researchers found that the markup rates for HBCUs were 30 points higher than non-HBCUs in those three states, nearly triple the 11-point difference elsewhere in the country.

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So not only do HBCUs typically have less money to spare than PWIs to begin with (thanks to years and years of funding discrepancies), but when they take on debt in order to improve, or simply maintain, their campuses, they have to pay more back in order to do so, further widening the financial gaps between HBCUs and PWIs.

The financial woes affecting HBCUs—and the effects they are having on their students—have long been documented, and it’s worthwhile to keep those institutions accountable, particularly in cases where funds are being mismanaged. But it’s also important to remember that HBCUs, much like the students who attend them, face a very different fiscal reality than their white peers.

Staff writer, The Root.

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DISCUSSION

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Historically black colleges and universities (HBCUs) pay higher underwriting fees to issue tax-exempt bonds, compared to similar non-HBCUs. This appears to reflect higher costs of finding willing buyers: the effect is three times larger in the far Deep South, where racial animus remains the most severe. Credit quality plays little role. For example, identical differences are observed between HBCU and non-HBCUs: 1) with AAA ratings, and/or 2) insured by the same company, even before the 2008 Financial Crisis. HBCU-issued bonds are also more expensive to trade in secondary markets, and when they do, sit in dealer inventory longer.

I found the Atlantic’s writeup of the abstract to be a bit obtuse, so I went directly to the abstract and found it a bit more helpful. What the paper appears to be concluding is that investors have biases against buying HBCU bonds that translate into underwriters having to work harder to find willing buyers and also to, importantly, a less active secondary market. The more active and liquid a secondary market for any given type of bond, the lower the interest rate is going to be on it.

To me this is even worse, because if the problem were as simple as “the banks are just being racist” you could, under a reasonable administration, step in and regulate that. You could say “Look at these two issuances. You charged the HBCU more and that’s illegal!”.

But even then, if the underwriting bank that markets the bond to investors saysWell, we had to spend more time and money rounding up other investors to buy the HBCU’s debt issuance, here are the receipts if you would like to see them”, then there’s not really much a regulator could do in that scenario.

Then, on the secondary market side, ECOA and the CCPA (taken together they represent our nation’s fair lending laws) don’t really cover institutional debt issuances.

While this paper may do a good job of proving that secondary markets as a whole are racist, it would be very challenging to prove that any given investor in a secondary market was specifically racist when they purchased another bond instead of an HBCU bond. Finance bros are occasionally dumb enough to put evidence that they are doing shady shit in email, but it’s rarely ever as on the nose as “Well sure, it’s a AAA rated bond, but it’s HBCU AAA, which means that there’s a lot of black people and that’s bad. Let’s buy a bunch of Tesla bonds instead!

Point being that this is a very pernicious manifestation of racism that I’m not sure even a meaningfully more progressive government could eradicate.