Education Loans and Financial Balance Sheets Among Black and Hispanic Young Adults

Background: Use of education loans as a way to finance college education has grown rapidly, with minority students and their families being particularly burdened with education loan debt. Given the rising education loans and the increasing racial/ethnic and age disparity in wealth accumulation after the recent recession, it is timely and important to examine how education loans affect the ability of future wealth building among minority young households. This study examines two research questions. First, is having education loans associated with the future financial balance sheet among Black and Hispanic young adults? And second, does amount of education loans affect their financial balance sheets?

Methods: The study uses data from the 1997 cohort of the National Longitudinal Survey of Youth (NLSY97), and the respondents are representative of the U.S. population born between 1980 and 1984. This study uses 15 rounds of data collected between 1997 and 2011-2012. The study sample consists of Black and Hispanic participants who responded to assets questions at age 30 (n=1,455). Education loans is measured with one dichotomous indicator that captures whether the respondent had outstanding student loans and a continuous variable that captures the total amount of outstanding loans upon leaving college. Financial balance sheets is measured with total net worth, the value of financial assets, and the value of nonfinancial assets. We use a treatment-effect model with maximum likelihood estimator to test whether having outstanding education loans upon leaving college affects financial balance sheets at age 30, and we utilize multiple regression analysis to examine the relationship between the amount of outstanding educational loans and measures of financial balance sheets.

Results: The results indicate that having education loans is negatively related to net worth and nonfinancial assets of respondents, after controlling for years of education, work hours, and other socio-demographic characteristics. Amount of education loans, however, is not related to measures of financial balance sheets among those who had education loans. Among the covariates, years of education is a stronger positive predictor for values on net worth, financial assets, and non-financial assets, after controlling for education loans and other variables in the model. Black young adults have lower values of net worth, financial assets, and non-financial assets than Hispanic young adults, similar to never-married young adults compared to their married counterparts.

Conclusion and Implications:  In a period of rising education loan burdens and marked racial/ethnic disparities in wealth accumulation, the current study provides some evidence that having education loans is possibly a barrier to future wealth building among Black and Hispanic young adults. Therefore, addressing minority college students’ financial needs with additional education loans and other types of credit may be counterproductive for their future financial health and even may magnify racial/ethnic disparities in wealth. It is important to create and implement strategies to enhance opportunities for these students and their families to save early on for the costs of a college education.