Racism is the reason black colleges pay more for loans


It’s expensive to be poor. And few places in higher education feel this more acutely than historically black colleges and universities (HBCUs), where endowments are generally smaller and the inscriptions fluctuated wildly over the past decade.

Now, to be clear, the financial misfortune of black colleges does not rest entirely on their shoulders. Born out of necessity primarily after the Civil War to educate black people who were excluded from most other colleges, institutions have since been plagued by uneven and inadequate funding. HBCUs, half of which are public, derive the lion’s share of their revenue from state and federal funding. And as states tighten their belts on higher education spending, these institutions are struggling to find the funds to improve their campuses by constructing new buildings or renovate them which have started to wear out.

But there is a way for colleges to circumvent their funding problems to pay for campus improvements: go into debt. But even then, the legacy of racism in the treatment of black colleges is apparent.

There are a few steps colleges must go through to issue bonds. First, they need to find a bank to buy the debt. The bank will then sell the debt to public investors. The banks are the gatekeepers, and they basically approve that the loan is not a scam. But banks don’t do it for free. They usually sell the debt for a small markup in compensation for expenses and management fees, and it ultimately goes to the college to repay.

A upcoming study in the Journal of Financial Economics examines the differences between these surcharges for HBCUs and non-HBCUs. The researchers – Casey Dougal of Drexel University, Paul Gao of Notre Dame, William Mayew of Duke University and Christopher Parsons of the University of Washington – used a 23-year sample of 4,145 exempt municipal bond issues of tax issued by 965 four-year bonds. , non-profit colleges.

They found that black colleges pay more to issue debt. “For the typical non-HBCU, 81 cents of every $100 raised goes to banks. The HBCU average is 11 points higher, at 92 cents per $100 raised. So, for a $30 million bond issue, a black college would pay $276,000, while a non-HBCU would pay $243,000.

Now, that definitely doesn’t mean that race is the determining factor. The difficult part of the analysis, Gao told me, was determining whether the difference could be attributed to factors other than black colleges’ affiliation with racial minorities. Thus, the researchers controlled for characteristics of the bond such as the amount collected, when the bond will be refunded, and the ability of colleges to pay earlier. They also looked at the quality of the bank selling the bond, as well as school metrics such as enrollment, alumni award rates, and rankings. But even after controlling for all of these factors, black colleges still paid significantly more — 16 points more than non-HBCUs.

Another possible explanation, that HBCUs have bad credit and are not attractive to investors, could also not explain the difference. The researchers checked the credit score and only looked at deals with AAA ratings – the kind where timely repayment is essentially a given – and the difference, 16 points, remained the same.

This led the researchers to conclude that there could be no other answer: racism was the main driver.

Yet another discovery drove this conclusion more clearly. “If racial animosity is the primary reason that HBCU-issued bonds are more difficult to place,” the researchers wrote, “then such friction should be amplified in states where anti-Black racial resentment is greatest. serious”. And sure enough, by separating black colleges in Alabama, Mississippi, and Louisiana, the researchers found that HBCU markup rates were 30 points higher than non-HBCUs in those three states—nearly triple the difference of 11 points elsewhere in the country. .

Black colleges have a few options to get around this problem. The federal government has a program — the HBCU Capital Funding Program — that provides low-cost loans to institutions, but it has its fair share of problems. The researchers offer a handful of policy solutions: incentivize foreign investors to buy the bonds or, perhaps, exempt HBCU bonds from all taxes, making them more attractive to potential investors.

It is unclear whether these recommendations will be taken seriously, but what East It is clear that the factors causing blacks’ difficulties in the financial markets do not spare black colleges.

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