By James Mwombela, CFP®
I’m sure when you heard about Robert F. Smith’s decision to pay off the student loans of Morehouse College's entire class of 2019, you thought “where was he when I was graduating?” On a serious note, his generous gift is timely given the recent national discussion about the racial wealth gap. You may have heard that despite gains in education and income for black Americans, the gap between wealth controlled by black families and wealth controlled by white families is getting worse. In 2016, black families had a median net worth of just $17,600 compared to $171,000 for white families. Since wealth is a large determinant of freedom and quality of life, this is an urgent problem.
What can we do?
In my opinion, the three targets that would make the highest impact in closing the racial wealth gap would be (in order of importance):
- Student loan debt
- Access to business capital – both debt and equity
- Mortgage down payment assistance
Access to capital would help entrepreneurs of color execute profitable business ventures when they would otherwise lack the funds to get started. Widespread access to capital for black entrepreneurs could produce vibrant entrepreneurial centers as we witnessed in the early 20th century with Black Wall Street communities in Tulsa, Oklahoma and Durham, North Carolina. Wealth generated in these communities could be reinvested back into the communities, creating a multiplier effect that could serve as a stabilizing force to combat social challenges.
Home down payment assistance would address one of the largest causes of the racial wealth gap. As part of the New Deal in the 1930s, government programs and subsidies made homeownership possible for millions of middle-income Americans. However, blacks were usually excluded from these programs. Redlining of black neighborhoods also meant that black Americans who managed to buy homes experienced lagging property values compared to white communities. This is especially noteworthy given home values account for about two-thirds of wealth controlled by the American middle class. For example, a primary residence bought by a white household 50 years ago for $14,000 could be worth between $600,000 and $700,000 today. That presents a huge source of wealth which can be accessed through home equity loans or selling the home, not to mention the freed up cash flow when the home is paid off. Current tax law allows married couples to shelter up to $500,000 in capital gains from the sale of a primary residence. And finally, home equity is a great way to pass wealth down to the next generation, as current tax law provides heirs an opportunity to pay no capital gains taxes on proceeds from the sale of inherited property.
What this means to Morehouse grads
With this estimated $40 million gift, Robert F. Smith, who is worth $5 billion, has removed what is possibly the largest impediment to the wealth-building ability of Morehouse’s class of 2019. A 2017 longitudinal study by the Department of Education followed undergraduate borrowers who began college in 2003. The study found that 80% of black students took out loans compared to 60% of their white and latinx peers, and nearly half of the black students ultimately defaulted. For a student with a $35,000 loan (the national average) repaid over twenty years at 7% interest, Smith’s gift would free up $271 per month which, if invested in a portfolio earning 10% a year (average historical return of the stock market), would be worth $186,000 in 20 years and $1.4 million in 40 years. For students with larger debt balances, Smith's gift makes an even bigger difference in their ability to build wealth. During his speech, Smith said that he expects every member of the class of 2019 to take his gift and "pay it forward." These graduates will now have more resources which can be used to heed his words and create opportunities for more people of color.
The expanding racial wealth gap should put to rest the idea that black families can catch up to white families simply by working hard and pursuing education. In 2016, the median net worth of black families with a bachelor’s degree or higher ($68,000) was still less than whites without a degree ($98,000). That piece of paper alone cannot reverse decades of discrimination in employment, housing, education, and other areas. Since the grandparents of the average black student faced inferior opportunities to earn income and build wealth, they had fewer resources to support that student’s parents. The parents in turn had fewer opportunities to achieve financial success and fewer resources to support the student. This increases the chances that that student will have to borrow to pay for college and graduate saddled with debt, making it more difficult to build wealth. That student is more likely than her white counterparts to be one of the only people in her family/social circle to have a college degree, and she may feel compelled to provide financial support to others. Racial discrimination persists to this day, further enforcing the racial wealth gap. Even if discrimination were to vanish, the fact that wealth begets more wealth through compounding investment returns means that there just may not be enough time for black wealth to catch up without substantial intervention. It will be interesting to see if researchers decide to follow Morehouse’s class of 2019 and analyze their life journeys side by side with their debt-carrying peers. Perhaps this graduating class can be used as a model which can drive the conversation forward to substantive policy solutions to the racial wealth gap crisis.