# Wealth Inequality and Student Debt

It’s commonplace for some to note that there are racial and class disparities in student debt levels and then hastily conclude that the cost of college is a cause of wealth inequality. These analyses strike me as deeply confused. Consider the following example.

Scenario One: Non-Free + Price Discrimination
In the status quo, our college finance system provides means-tested tuition subsidies and living grants, such that the actual net cost of attending college varies based on class. The result is that the richest fourth of students (which we can also assume are disproportionately white) are charged around twice as much as the poorest fourth of students (which we can also assume are disproportionately non-white). So let’s look at how this arrangement might shake out for two hypothetical students.

Rich Student

1. Rich student is charged \$100,000 for four years of college.
2. Rich family transfers their kid \$100,000 of wealth to cover the charges.
3. Rich student leaves college with a net worth of: \$0.

Poor Student

1. Poor student is charged \$50,000 for four years of college.
2. Poor family transfers their kid nothing. Kid takes out \$50,000 of public loans to cover the charges.
3. Poor student leaves college with a net worth of: -\$50,000.

As you can see, there is a \$50,000 net worth difference in this scenario.

Scenario Two: Free College
In this scenario, we subsidize all tuition to zero and provide living grants to all students. Let’s see how this plays out for both students.

Rich Student

1. Rich student is charged \$0 for college.
2. Rich family, freed from having to pay for college, transfers rich student \$100,000 for the down payment on their first house.
3. Rich student leaves college (enters adulthood) with a net worth of: \$100,000.

Poor Student

1. Poor Student is charged \$0 for college.
2. Poor family transfers their kid nothing.
3. Poor student leaves college with a net worth of: \$0.

As you can see, in this scenario, there is a \$100,000 net worth difference between the two students, twice as large as the net worth difference in the first scenario. So, it would seem, this scenario actually creates more wealth inequality than the first scenario.

What’s Going On
I suspect there are two reasons people don’t seem to understand this basic reality. The first is that they are fixated on debt as a standalone thing, instead of net worth. Indeed, if you take scenario two and only look at debt, you’d find that the two students have identical student debt (i.e. \$0). But wealth is a function of both assets and debts. Freeing up a rich student from paying for college allows them to take the \$100,000 transfer and put it into their asset pile rather than using it to pay down their debt pile.

The second is that they don’t actually see that what is driving wealth disparities among these students is not the charging of tuition (which actually reduces the wealth disparity because of the price discrimination), but rather the intergenerational wealth transfers. Crucially, making college free does not stop the wealth transfer from happening, and as such does not stop the ongoing racial/class wealth disparity.

A Better Way
This does not mean that there is no other way to argue that student debt contributes to inequality. It’s just that you have to go about the argument in a much different way. One way to do this would be to say that, because of debt aversion, reduced financial sophistication, and higher risk, the student debt barrier reduces the number of poor people and people of color that attain a higher education. Thus, getting rid of that financing barrier, even if it does mean an increase in wealth inequality in the first instance, will actually reduce wealth inequality in the second instance through the effect of having more equal incomes across racial and class (class defined as birth class) groups.

This argument may or may not be true. It really just depends on how the empirics shape out. But, importantly, it will proceed not by showing the debt levels of poor students or students of color are somewhat higher than the debt levels of rich students or white students. Instead, it will proceed by showing how financing changes affect attainment at the margin. This is a much more interesting type of argument, but for now it seems mostly sidelined in favor of the rather pedestrian observations that wealthy parents transfer more money to their kids than non-wealthy parents.