A.M. Money and the Racial Wealth Gap
We just announced a very generous grant from The Chicago Community Trust to expand our portfolio as a part of their strategy to build household wealth and advance income mobility. This builds upon an initial catalytic grant provided by the McCormick Foundation designed to allow A.M. Money to continue growing our affordable loan portfolio for high-performing, low-income college students who have not had access to traditional student loans. We are exceedingly grateful for this support, and for what it means for us and our work at A.M. Money.
As student debt is undeniably a controversial subject, I wanted to spend a few minutes talking about that work, the racial wealth gap, and the role we play in advancing these pursuits.
First, I think it’s important to outline a few of the core assumptions that we operate under:
1) Higher Education is worth investing in.
We understand it may not be for everyone, or that there may be reasonable alternatives out there for some people. However, our view - which is consistent with a lot of the evidence out there - is that higher education is by far the most effective, and efficient path for individuals, especially people of color, to secure gainful employment and build household wealth.
2) Families, and individuals are increasingly being asked to bear the burden of this investment.
It used to be that someone could work a part-time job during the year, and maybe a full-time job in the summer, to pay for college. Those days are long gone. This means that individuals are forced to finance higher education from their personal wherewithal. As much as we believe this should not be the case, it’s an undeniable fact and we don’t necessarily see this changing.
3) The market, as it exists today, does not support the type of individual investment explained above.
The lending programs offered by our government have their natural limits as they cannot be everything to everyone. As a result, many people need to rely on other lenders, or sources of capital, to finance their education. The market, charitably speaking, is not set up to support this type of investment.
Today’s market relies upon credit scores and parental income in order to underwrite their loans, which means people of color, and others without means, are forced into high-interest rate products or other sub-optimal pathways like using credit cards, payday loans, or in my own personal case, enlisting in the U.S. Army in order to obtain the educational benefits (amongst others) of attending their desired University.
“it’s important to build an organization that is predicated on the fundamental success of students as opposed to the extraction of wealth”
The net result here is either a lack of capital to complete your educational pursuits or an invisible tax (or rent) that is continuously being assessed on serially excluded communities with minimal wealth. As a result, individuals are increasingly forced to overextend themselves to pursue higher education, paying a higher price to do so, and not getting the same return on investment they were promised at the outset. This scenario only exacerbates the racial wealth gap as minorities are prevented from reaping the same wealth and income mobility benefits as their white counterparts.
This is a perfect storm for what Louise Seamster, a sociologist at the University of Iowa termed “Predatory Inclusion”, a “process wherein lenders and financial actors offer needed services to black households but on exploitative terms that limit or eliminate their long-term benefits”. They posit that is one of the mechanisms behind the persistence of racial inequality in America, a belief that we strongly share.
As such, our approach is based upon directly countering this mechanism of predatory inclusion by ensuring that people have a product that enables them to achieve the long-term benefits of higher education, as opposed to limiting them.
This means a few things in practice:
1) Providing access.
It’s important that people are able to get a product on their own merits, rather than as a function of their parental or communal situation which may have no reflection on their ability to take advantage of a higher education. This means forgoing things like credit scores and co-signers to instead focus on what a student has demonstrated that “de-risks” their pursuit of higher education and attainment of a job.
2) Providing access on terms conducive to success.
To put it simply, a 15% interest rate on a student loan is a destructive self-fulfilling prophecy. This creates a spiraling debt load that is highly difficult to overcome.
This approach has led to working with institutional investors like the McCormick Foundation, and The Chicago Community Trust who have a vested interest in the success of the student, not just the maximization of their bottom line. Another example of this, is the Illinois State Treasurer who has been working to invest a portion of its investment portfolio in reducing the cost of student loan debt in Illinois through innovative means.
This is important work because without the alignment of capital and the accompanying incentives, it will be impossible to scale any approach.
3) Creating an organization aligned on the long-term well-being of its customers, instead of the extraction of the benefits of higher education.
We know that in all asset classes, borrowers of color and those without means are often not afforded the same opportunity that other borrowers might have. Student debt is no exception. One data point that we believe illustrates this point is that African American Borrowers who have paid off their student debt, are twice as likely to have gone into default than their white counterparts. Hispanic borrowers are 3x as likely to have gone into default.
This underscores the fact that even those students of color who have had their investment in education result in a meaningful degree may end up paying more than their peers.
A recent report from the Student Borrower Protection Center shows that African American students are not afforded the same opportunity to take advantage of consumer protections to avoid default, and thus be on the path towards building wealth. This is a large, and very overlooked mechanism that allows organizations to strip the value of higher education from vulnerable populations.
Therefore, we believe that on a fundamental basis, it’s important to build an organization that is predicated on the fundamental success of students as opposed to the extraction of wealth. To this end, we have invested heavily in understanding where, and when our financing is additive, instead of extractive.
Additionally, we have spent a lot of time mapping out what the different positive and negative pathways can look like for a student, so we can proactively assist our borrowers in avoiding common pitfalls. Fused into these pathways are the additional supports we have created to help students take advantage of both known and unknown opportunities.
Everything we do from wealth-building workshops, free financial literacy courses, our resume feedback tool, and our other job matching opportunities are in service of this. These are not “nice to have”. These resources are a proven and critical part of our success.
When we design and apply policies, practices, or rules that appear to be neutral or innocuous yet result in a disproportionate impact on communities of color, we are inadvertently promoting prejudiced and biased systems that inhibit wealth and income mobility for too many. That is why we’re excited to be able to expand this work, and we are appreciative of the support from The Chicago Community Trust and the McCormick Foundation in service of our mission. If you’d like to learn more about what we are doing and are thinking about how these issues can be addressed even more effectively, please do not hesitate to reach out.