Debt, Delinquency, and Racial Disparities in Massachusetts

Debt has several faces. Borrowing money for long-term investments can be beneficial because it allows individuals or businesses to leverage capital they don’t currently have to invest in opportunities that can yield strong returns over time. Taking out a student loan, for example, can help someone build human capital that increases long-term earning potential. Counterintuitively, more debt can be a benefit if borrowers are able to make regular payments and if the investment yields returns that exceed the cost of borrowing.

But often debt becomes an onerous burden, from high-interest credit cards that lock households into unaffordable payments to medical debt that seems too large to tackle. This debt makes it difficult to accrue wealth, drains disposable income, and threatens to become delinquent debt that can ruin borrowers’ credit scores.

Even within debt types, debt can be a double-edged sword. Taking out a mortgage, for example, helps some borrowers buy homes that will appreciate over time, helping to generate wealth. But not all mortgages are the same. One cause of the Great Recession, for instance, was the proliferation of predatory home loans with confusing terms, like interest rates that increased over time. This left many borrowers vulnerable to foreclosures and substantial loss of wealth. Similarly, student loans help many borrowers move into successful careers as nurses, teachers, and engineers. But borrowers who attend some for-profit schools can end up with high monthly loan repayments not worth the degree they may or may not have received.

What makes the dual nature of debt even more complex are the underlying patterns of racial disparities. This is an issue we explored in Debt: Exploring Wealth Beyond Assets, a virtual event on May 9, 2024, in the Racial Wealth Equity Research and Conversation Series, featuring research from the Aspen Institute’s report Disparities in Debt: Why Debt is a Driver in the Racial Wealth Gap. In this research brief, we highlight some key findings from Aspen’s work and pair it with some additional analysis of our own.

The Aspen Institute’s report concludes that, “Compared to white people, the debt held by people of color is: 1) more likely to be harmful; 2) more likely to involve the court system; and 3) more likely to have spillover non-financial consequences.” These are useful points to keep in mind as we explore debt through the remainder of this piece.