By Kiyadh Burt
This fall marks the end of the Department of Education’s COVID-19 student loan forbearance program, which means that roughly 43 million borrowers with federal student loans will be expected to start payments again in October, posing a major setback in the fight to close the racial wealth gap.
One of the primary wealth building tools, caught in the crosshairs of this policy, is homeownership. As payments resume Black households will be disproportionately affected and will once again face increased barriers to homeownership and building wealth.
Any obstacles to homeownership, particularly among Black households, have severe consequences. The median wealth of homeowners ($254,900) is more than 40 times greater than that of renters ($6,270). Among renters and households of color, the gap is even more stark: the median wealth of Black homeowners ($113,130) is 60 times that of Black renters ($1,830).
The Gap Remains Acute
On top of existing disparities, homeownership has never been accessible to everyone at the same rate. Due to historic patterns of discrimination and exclusion in housing opportunities, the racial homeownership gap remains acute. Three-quarters of white households are homeowners, while less than half (49%) of Black households are homeowners. This size of the disparity persists at the national level and for each state within the Deep South.
The pause on student loan repayments over the past three years of the COVID-19 pandemic provided the opportunity for borrowers to begin working toward financial stability and wealth by saving money, paying down debts, and, in some cases, purchasing their first homes. Intentional efforts must be made to ensure Black borrowers are not locked out of this essential step to build wealth.
Taking Hits
Having outsized loan balances can raise borrowers’ debt-to-income (DTI) ratios — which most lenders consider to be an important indicator of borrower creditworthiness in their underwriting decisions — and prevent them from saving money.
Additionally, for borrowers who have defaulted on their student loans, the hit to their credit score could make them ineligible for additional loans, including mortgage loans for housing security, forcing Black families once again into generational financial insecurity, in contrast to their white counterparts. The National Realtors’ Association finds that 51% of renters say that student loan debt keeps them from buying a home.
One Example
Take, for example, a recent borrower in Mississippi. A Black woman with a job as a behavioral counselor applied for a government-backed mortgage. This type of mortgage appeals to many borrowers due to its lower interest rate. Eligibility requirements, however, are less flexible. With $70,000 in student loan debt, her monthly student loan payment made her ineligible for this type of mortgage.
But this doesn’t just impact her. The example underscores how the presence of student loan debt has an outsized impact on the ability of many households of color to transition into homeownership.
The distribution of student loan debt puts the challenges facing potential Black homebuyers into even more blunt relief. Approximately 86% of Black students have student loan debt as compared to 68% of white students. Four years after graduation, Black students owe an average of 188% more than white students. And twenty years after starting college, white borrowers’ median student debt fell to six percent, whereas the median Black borrower still owed 95% of their loan.
Bigger Hurdle
For Black women, the debt hurdle is even steeper. While women graduate owing more student debt than men ($22,000 in contrast to $18,880 respectively), Black women substantially eclipse the two demographics with an average of $37,558 in student debt. Factor in the gender wage gap and it comes as no surprise that women take two years longer than men to repay student loan debt, with Black women bearing the brunt.
With the rising costs of living and interest rates, household budgets have tightened and weakened their ability to withstand additional debt. Black and brown households are disproportionately burdened by debt given they are already less likely to have a financial cushion to withstand an economic downturn. The forthcoming student loan debt repayments will further strain their ability to meet everyday household needs.
Solutions Available
Solutions exist. HOPE Credit Union offers a mortgage product, the Affordable Housing Program (AHP), designed to address systemic obstacles for potential homebuyers with student loan debt. Through the AHP borrowers do not need a down payment, mortgages are manually underwritten, and nontraditional indicators of credit repayment history are considered. The product also discounts deferred student debt, and does not require mortgage insurance. It has been an indispensable tool for expanding Black homeownership.
Over the past five years, 80% of the AHP loans closed went to Black borrowers; 58% went to women-headed households, and 85% went to first time homebuyers.
This success can be replicated on a national scale — though reforms are needed. Government-sponsored entities (GSEs), financial institutions such as Fannie Mae and Freddie Mac, and the Federal Home Loan Bank system must create a market for these types of loans that allows lenders to be compensated to continue this work while not requiring pricing that makes the loans unaffordable to borrowers.
Front and Center
Flexible down payment assistance must also be front and center in policymaking to advance homeownership among people of color. Black households have far less family wealth than white households, which opens the door for many first-time homebuyers.
Down payment assistance programs level the playing field by making it easier for people who lack family wealth to obtain the resources they need to purchase their first home.
One promising approach for targeting down payment assistance includes a focus on first generation homeowners. The Urban Institute finds that 4-8 million households of color would become first time homebuyers through a down payment assistance program structured in this manner. H.R. 4495, the Down Payment Toward Equity Act, represents one of the most significant pieces of legislation crafted to meaningfully decrease the racial wealth gap through homeownership. Through the Act, Congress would appropriate $100 billion in down payment assistance grants to first time home buyers. The Department of Housing and Urban Development (HUD) would administer the funds which would address the intergenerational challenges of capital access for the purposes of buying a home.
More Important Now Than Ever
The three year pause on loan payments acted as an important, albeit limited and short, method to close the racial wealth gap. As a result of systemic and racist inequities in our education, banking, and housing policies, Black people, especially those living across the Deep South, have not been able to build wealth at the rate of their peers.
After centuries of having wealth stripped from Black communities, it’s more important now than ever before to provide meaningful support in the ability to build and pass on wealth to future generations through homeownership.
While a college degree can be an important asset for Black students, its benefits can only fully be realized if student loans do not hinder access to long-term financial stability.
Kiyadh Burt is director of policy at HOPE Credit Union’s Policy Institute.