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Excerpted From: Katherine Welbeck, Race: Examining Legal Remedies for Disparate Student Debt Outcomes, 74 Consumer Finance Law Quarterly Report 27 (2020) (68 Footnotes) (Checkout Library for Full Document)


Katherine WelbeckThe nation is in the midst of an unprecedented student debt crisis. Today, more than 45 million borrowers bear the collective burden of $1.7 trillion of student loan debt, making student debt the second largest consumer financial market after mortgages. But the amount of student debt is not the only component of this crisis. Delinquency and default rates for student loan borrowers rival mortgage default rates of the 2008 financial crisis, creating a rippling fallout across borrowers' financial lives.

The most significant consequences associated with the nation's student loan crisis are not borne equally by all borrowers. In neighborhoods all across the country, Black and Latinx borrowers shoulder this burden most acutely-- experiencing some of the most severe economic harm associated with student loan debt. For example, Black and Latinx borrowers face disproportionately high rates of delinquency and default on their student loans, creating a cascade of other economic harm, including negative credit reporting, administrative wage garnishment, and Social Security offsets. As a result, where student debt was once praised as “good debt” offering a pathway to the middle class, research shows that student debt actually impedes socioeconomic progress and exacerbates systemic inequalities.

When researchers and policymakers seek to understand the role of the student debt crisis in perpetuating racial and economic inequality nearly every aspect of higher education finance is implicated. These disparities reverberate across debt collection markets, predatory marketing and financing at for-profit institutions, and unfair lending practices that disproportionately penalize Black and Latinx borrowers.

However, regardless of school sector, type of loan, or specifics related to the borrower's course of study, one critical component of the market touches every borrower--student-loan servicing. Servicing refers to the management of a borrower's repayment process by a lender or a third-party company that the lender hires. Loan servicers perform tasks like contacting borrowers ahead of their next payment date, processing borrowers' payments, and reporting borrowers' payment progress to credit bureaus. Importantly, servicers are also responsible for helping borrowers access a range of protections that they are entitled to under the law, or lenderf specific protections, to help mitigate the burden of student debt. This responsibility comes into play if, for example, a borrower is struggling to keep up with their loans. The servicer should then help inform the borrower of available income-driven loan repayment options. However, these protections are often illusory to the most vulnerable Americans. Data shows stark disparities in who gets access to student loan payment relief. Research suggests, and federal regulators have echoed, that the companies responsible for implementing this relief--student-loan servicers--may be to blame.

This paper will first explore the breadth of research documenting vast disparities across the student loan market. The author will explore how this data supports the argument that student-loan servicing plays a critical role in perpetuating disparate outcomes for borrowers. The paper will then review the range of legal remedies available to regulators, law enforcement officials, and private attorneys seeking to hold servicers accountable and remedy deeply entrenched racial inequities.

In order to achieve greater racial equity and economic justice, regulators, enforcement officials, and policymakers must rigorously use every available tool to remedy the broad racial disparities of the student debt crisis. In some cases, policymakers may even look to pass new laws and mechanisms to address these disparities.

[. . .]

Education has always been a pillar of the American Dream. Our country has long pushed the idea that an education--no matter the cost--is a path to a better life. But as with so many other aspects of the American Dream, the reality of educational costs has not been the same for white students and non-white students. America has a long history of discrimination in higher education. Discrimination and disparities caused by student loan companies at the heart of the student loan market only serve to reinforce systemic disenfranchisement.

Student loan debt places an enormous burden on communities across the county, but has disproportionately harmful effects on Black and Latinx borrowers. These acute harms facing Black and Latinx borrowers directly affect their overall economic outcomes and create a legacy of inequity--from higher reliance on debt to pay for higher education to alarming rates of delinquency and default. In other words, the disproportionately negative outcomes in Black and Latinx families is both driven by and reinforces overall negative economic outcomes in those same communities.

Tackling debt disparities through the broken system of student-loan servicing is critical to curtail disparities in delinquency and default. While this may not eradicate all gaps, federal and state enforcement of ECOA and UDAAP laws are fundamental to stamping out practices that have a discriminatory effect on certain subsets of borrowers. Additionally, the creation of new legal tools, such as a mandatory reporting mechanism, will provide greater transparency into the market, showing which borrowers are experiencing the greatest harms associated with student debt.

Time and again, a lack of race-consciousness has impeded efforts to alleviate the burden of student debt that exacerbate the burden for borrowers of color, thereby compounding racial disparities. Policymakers, regulators, law enforcement officials, and private attorneys have an obligation to establish and utilize every tool at their disposal to dismantle this fundamentally broken system.

Katherine Welbeck is the Civil Rights Counsel at the Student Borrower Protection Center (SBPC), a national nonprofit organization that works to protect student loan borrowers through advocacy, policymaking, and litigation strategy. Her work at the SBPC primarily focuses on examining the student debt crisis through a lens of racial and economic justice.

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