Government and academic research shows that African Americans are much more susceptible to falling into deep debt than the white population through hefty credit card balances, and student, auto, and home loans.

The same research reveals that African Americans often seek a financial remedy — high-interest payday loans — that can make matters worse.

Meanwhile, studies show that African Americans have not appreciably closed the wage and wealth gap with whites during the past five decades. In some cases, those gaps have widened, even as the African American population gained access to tangible signs of upward mobility, such as a college education.

“The numbers are pretty clear and the problems are pretty pervasive, so there’s work to be done,’’ said Don Baylor Jr., a senior associate with the Annie E. Casey Foundation, a Baltimore-based philanthropic organization that recently addressed debt reduction for African Americans through grants in seven Southern communities. “We want to pull together a wide spectrum of stakeholders — business leaders, policymakers and community organizations — that will get involved and take action.

“In the short term, we want to give more people an opportunity to be financially stable and move ahead. In the longer term, we are looking at policy reform, interventions that actually move the needle on decreasing the debt burden. We have to change those numbers.’’

Wealth Gap for African Americans

And what are those numbers?

According to the Economic Policy Institute, an independent think tank based in Washington, the average wealth (savings, retirement, equity) for an African American family ($95,261), is one-seventh that of a white family ($678,737). At the midpoint — the median level — a white family’s wealth ($134,230) is about 12 times greater than the wealth of an African American family ($11,030).

When the head of household has a college degree, the average wealth of an African American family is just $23,400, compared to $180,500 for a white family. When the head of household has a graduate or professional degree, the average wealth of a white family is $293,100 compared to just $84,000 for an African American family.

The average wealth (not income) of a white family with an unemployed head of household ($23,000) is nearly twice as much as the average wealth of an African American family with a head of household that is employed full time ($12,000). About one in four African American families have a zero or negative net worth. For white families, the figure is one in 10.

According to the Bureau of Labor Statistics, the monthly unemployment rate for African Americans was at 6.8% in December 2017, the lowest rate since the figures were first tracked in January 1972. The unemployment figure for whites was 3.7%, closely mirroring a historical trend that generally has seen African Americans having an unemployment rate twice as high as whites.

The U.S. Census Bureau said African American households had a $39,500 annual median income in 2016, while white households were at $65,000. When the head of household had a bachelor’s degree, the average African American household had an $82,300 annual income, while white households were at $106,600.

The Federal Reserve of Boston, in cooperation with Duke University and The New School, published a comprehensive analysis on the African American Wealth Gap. Review their findings here in The Color of Wealth.

How Income Levels Translate to Debt

The huge disparity in income and employment levels is the primary reason African American families struggle with debt.:

In its 2015 financial capability report, the Financial Industry Regulatory Authority (FINRA) said 16% of African Americans were “underwater’’ in their mortgages (owing more than their homes were worth) compared to 8% of whites.

Here are other categories of finance that show the economic divide between African Americans and whites:

  • 56% of African Americans engage in expensive credit-card behaviors (paying the minimum, paying late fees, paying over-the-limit fees) compared to 35% of whites
  • African Americans were more likely to have a student loan than whites (38% to 22%) and a higher incidence of having a late payment (49% to 32%)
  • More African Americans (39%) than whites (21%) are likely to utilize non-bank borrowing, such as payday loans. Only 40% of African Americans reported having good/very good credit, while the figure was 65% for whites.

“There has been some structural economic changes like the expansion of all different forms of credit, more ways to get into debt,’’ Baylor said. “When you couple that with a wage disadvantage and a non-growth disadvantage in many other areas, it has just geared itself to higher debt levels for (African Americans).’’

African Americans and Student Loans

Baylor said he considers the African American student loan problem to be a special concern.

“The reliance on student loan debt is most concerning to me,’’ Baylor said. “Given the long-term nature of the debt, the fact that you’re not really building equity as you pay it off and the ability to dismiss that debt in any type of settlement or bankruptcy is pretty much nil, I would put student loan debt in its own major category. It’s a perennial drag on the assets of many African Americans.’’

The problem was spotlighted in data released by the U.S. Department of Education, which studied students who entered college for the 2003-04 academic year and utilized a student loan. Twelve years later, their outcomes were noted.

The highlights:

  • African Americans Were More Likely To Borrow: African Americans (78%) took out student loans at higher percentages than whites (57%).
  • No Progress At Paying Down The Loan: Twelve years later, African Americans owed more than the original loan (113%), while whites had made some payment progress (65%).
  • Degree Doesn’t Matter: For African Americans who earn a bachelor’s degree, they still owed 114% of the loan a dozen years later (compared to 47% for whites). In fact, with all possible outcomes, African Americans owed more than the original loan in each case — associate’s degree (124% for African Americans to 76% for whites), achieved certificate (108% for African Americans to 70% for whites), still enrolled (115% for African Americans to 97% for whites) and dropped out (106% for African Americans to 68% for whites).
  • DefaultNearly half (49%) of African Americans defaulted on their student loan compared to 21% of whites.
  • Drop Outs: For students who dropped out of a four-year, for-profit college, 75% of African Americans defaulted on their student loan compared to 50% of whites.

How can African Americans achieve a greater success rate in student loan debt?

Baylor said it begins with policymaking. More African American students need to be properly represented at institutions that have adequate resources to educate them. He said admission practices and funding systems should be studied and perhaps revised. That includes a hard look at federal financial aid because even African American students who earn degrees are clearly at financial risk.

On a larger scale, Baylor said, it would be a major achievement to have more African American students without large student loan debts to repay, allowing them to begin their careers with the ability to accumulate wealth and put them on equal footing with white peers who didn’t need to borrow or have a lower loan balance.

African Americans and Payday Loans

In desperate situations, African Americans are more inclined to utilize payday loans, which are essentially advances on someone’s paycheck. According to a study by the Center for Responsible Living, the average annual interest rate on a typical payday loan is 400%, thus crippling the finances of anyone who chooses this method to help make ends meet.

Here are some potential dynamics.

A study by the Massachusetts Mutual Life Insurance Company concluded that 30% of African American workers have $500 or less in their emergency fund. Those same workers said an unexpected expense of $5,000 would cause “significant discomfort’’ and they probably wouldn’t be able to get by.

Let’s say one of those African American workers needs $325 to cover part of the rent and a utility bill, but payday isn’t for 10 more days. The worker can go to a payday-advance store. By proving a paycheck is coming and signing a loan agreement, the worker can write a check for the advance plus a fee (let’s say $400 — the needed $325 plus a $75 fee).

The lender will pay $325 to the worker immediately, then hold that check until the next payday. But here’s the problem: If the borrower doesn’t have enough money in the bank to cover the payday loan, the penalty is crippling. Lenders can roll the principal over into a new payday loan  and a vicious cycle ensues. There are no installments with payday loans, so the debt is rolled over into a new loan with new fees. On average, the worker would end up paying $793 for that $325 loan (assuming the introductory fee and the loan being flipped to a new one approximately nine times).

Payday lenders insist they offer valuable services, such as an alternative to bank overdraft fees, returned-check charges and late fees. But Baylor and others view the businesses as predatory operations that target the poor and selected ethnic groups, such as African Americans.

How can African Americans escape payday loans?

“It’s about regulation and having a reasonable ability to repay,’’ Baylor said. “It’s about stimulating other low-cost financial products that meet people’s needs. And you need to have these products accessible to people, but not have them at 400 to 500 percent repayment.

“If you look at the South overall, where many payday locations originated, places like Alabama, Mississippi and South Carolina, a lot of those areas are heavily African American. Now some of them also connect with white rural communities as well. Even though there’s not consistent data, you can look at where these stores are located to paint a picture of the situation. They seem to be a constant in African American communities. It’s not good. It’s a problem.’’

One new wrinkle has cropped up for some technology-savvy companies. There’s now an Instant Financial app, which offers workers an on-demand system that gives them access to their money the day after they earn it. With a few swipes on their phone, workers can deposit their earnings and use the money to pay bills.

Here’s how it works: Each morning, employees get a notification of how much they earned the previous day. They can deposit half of the money on a debit card (usually with a $3 fee per transaction).

The new technology might imperil payday lenders, which have about 12-million American customers each year. But it’s also a challenge for everyone’s financial discipline. The traditional weekly or bi-weekly payroll system lends itself to budgeting and regular deposits into savings or retirement accounts.

Regardless of the system used, it doesn’t take away the importance of creating an emergency fund (typically about six months of earnings) or considering a debt management program through a nonprofit debt-counseling service.

Financial Resources for African Americans

The NAACP has long championed financial services for African Americans. Its economic department addresses poverty, lack of jobs, disproportionate high unemployment, lack of affordable housing and other economic issues.

It has programs in place for economic education, individual and community asset-building, diversity and inclusion in business hiring, career advancement and procurement and the monitoring of financial banking practices. For more information, visit www.naacp.org.

The federal government also offers various grants and financial assistance programs.

Among them:

  • Student Loan Debt: There are income based repayment plans that reduce the monthly payments or shorten the repayment period so borrowers will top out at 10% of their discretionary income. African American students (and others) who enter public service after graduation will have their student loan debt forgiven after 10 years. Click here to find other ways to get help with student loans.
  • Unemployment Aid: With the African American unemployment rate higher than the national average, help is offered in the form of cash grants, emergency assistance, COBRA tax credits and unemployment insurance benefits. Here’s a detailed list of public assistance programs.
  • Housing Assistance: The Department of Housing and Urban Development (HUD) supports foreclosure prevention and homeownership through its Housing Counseling program. HUD also addresses mortgage fraud and reinvests in neighborhoods. Here’s More.
  • Child Care: The Child and Dependent Care Tax Credit is available to middle-class African American families. Almost all families making less than $115,000 a year would see a larger credit on their tax returns. Read more on how to get help with child care costs.
  • Rental Assistance: The Project-Based Rental Assistance program helps African Americans (and all people) find new places to live, allowing low and moderate income households to find or keep safe and sanitary housing. It can also stop an eviction, help with energy bills and find places to live for the homeless. Click here to find additional rent programs.

There are other community action based government programs for African Americans. They generally require an application. Here’s where to Find your local community action agency, which has programs for low-and-moderate-income families, African Americans, the elderly, the disabled, and others.

Getting out of Debt

Whether it’s credit-card debt or student-loan debt, there are general principles that apply to everyone seeking a clean slate.

Here are a few tips that can be particularly useful for African Americans, which have higher unemployment and lower incomes than the general population.

  • Pay With Cash: It’s one way to have a handle on how much money you have — and where it’s all going. By paying cash and using online tools such as MoneyMinder, you will quickly learn about your financial values and whether adjustments are needed.
  • Buy Only What You Need: Try to avoid emotional spending. Think about what you really need — and don’t go looking for anything else. Before making a big purchase, sleep on it or give it some thought over a weekend.
  • Eat At Home: It’s the easiest way to save money. Really. Think of it this way. If you’re spending $100 a week on eating out, that’s $5,200 a year. If you save that amount at 5% interest over 10 years, you’ll have $68,000. OK, if you must eat out, at least limit things. Make it a random weeknight. Or make some of your favorite meals at home, but try to save on the groceries.
  • Pay Your Bills On Time: This is a no-brainer. It’s senseless to be victimized by late fees and other miscellaneous costs.
  • Don’t Spend Without A Budget: And as part of that budget, tighten the belt like you are the CEO of your own company. Review every bill. Streamline your cable. Cut the fat (such as miscellaneous fees, high interest rates and recurring automatic payments for goods and services that you don’t even use). Spend less, so you can save more to the emergency fund.
  • Create More Income: Find a side hustle. Take a part-time job tending bar, delivering pizzas or using your own work skills for a freelance opportunity. Sell your extra stuff on eBay. Invest your spare change on acorn.com. It’s all about consuming less and owning more.
  • Refinance Your Mortgage: If your home is underwater — you owe more than the home is worth — or if mortgage rates are especially low, this is a great option. Do your research, find a trustworthy lender and go from there.
  • Renegotiate Your Credit Card Bills: You’d be surprised at the flexibility of some credit card companies. They will negotiate terms. They are often motivated by getting something, not being left holding the bag. By renegotiating your Annual Percentage Rate (APR), your monthly payment will be more affordable.

And then there are the professional debt relief solutions.

  • Credit Counseling: Working with a nonprofit credit counseling agency provides a clear picture of your financial options. It can review your budget and evaluate all of your debt-relief alternatives. Many free services are offered by nonprofit organizations.
  • Debt Management: It provides a reprieve from interest rates, late fees or penalties from creditors. Under the debt management plan, you promise to pay back the full principal over a 3-5 year time frame. The debts from credit-card bills, medical bills, student loans, department-store cards and other lines of credit can be efficiently managed.
  • Debt Consolidation: You are reducing interest rates and combining all your debts into one manageable monthly payment. Under debt consolidation, you take out a loan, which is used to consolidate and pay off all your other debts.
  • Debt Settlement: You can negotiate a lump-sum settlement payment with creditors. It allows you to decrease the principal you owe while eventually retiring the debt. Debt settlement damages your credit score and is generally a consideration for people with very poor credit.
  • Bankruptcy: In dire circumstances, bankruptcy can give you a fresh start from your debt burdens. You can file for either a Chapter 7 bankruptcy, which cancels your debts, or a Chapter 13 bankruptcy, which sets up a years-long repayment plan.