Racial Gaps in Student Loan Repayment and Default: A Lifecycle Approach

Racial gaps in student loan accumulation and repayment are substantial. Using data from the Beginning Postsecondary Students survey, we document that Black students are more likely to borrow than White students, and they accumulate larger student debt conditional on borrowing. Black borrowers are also more likely to be enrolled in income-based or extended repayment plans, so they have lower average monthly payments and pay off their debt more slowly. Nevertheless, Black borrowers are 2-4 times more likely to default on student loans. To what extent can initial conditions and lifecycle financial circumstances account for these racial differences in student loan repayment and default? We construct a lifecycle consumption-savings model that captures observed heterogeneity in initial wealth and student debt, as well as unobserved heterogeneity in parameters governing initial human capital and lifecycle human capital accumulation. The model produces earnings dynamics, labor supply choices, human capital accumulation, and financial asset accumulation that are consistent with lifecycle data. We use our model to quantify the relative contributions from each of these channels to the racial default rate gaps over the lifecycle. We aim to use our model to advance policy proposals that can mitigate racial gaps in student loan default.

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