6.2.4 Debt and inequality

Debt means borrowing something now with a promise to repay it later. When people or institutions borrow money by taking a loan, they usually have to pay back more than they borrowed. This extra amount is called interest. The interest rate is shown as (usually yearly) percentage of the loan. Interest is explained as a reward to the lender for giving up use of their money and taking on the risk of not being repaid. In financial terms, a loan is a liability for the borrower, something they owe. For the lender, that same loan is an asset, something with value that is expected to bring income. This is a social relationship of obligations and trust.

Some assets, like loans, generate income again and again. Owners of these financial assets earn money passively through interest, while borrowers must keep working to repay what they owe. When legal systems, financial contracts, and global institutions favour lenders, this power imbalance can grow over time. Borrowers may face strict penalties for non-payment regardless of their situation, while lenders are protected. In this way, debt can reinforce inequality across households, businesses, and entire countries.

Debt can help people improve their lives, but it works very differently for rich and poor households. These differences can make inequality worse over time.

One big difference is how lenders see people with different amounts of income and wealth. People who already have more money are seen as less risky. They can get loans more easily and pay lower interest rates. This gives them access to credit they can use to invest in things like property, education, or businesses. These investments help them earn more money in the future, which makes it even easier to borrow again later.

People with less income or wealth are seen as higher risk. They have fewer options for borrowing and often pay higher interest rates. Many need loans just to cover basic needs like food, rent, or medicine. Because they can't borrow affordably, it's harder to invest in anything that would help them earn more. Repaying debt takes up a big part of their income, so they stay stuck in a cycle of borrowing again and again.

This creates a feedback loop. A person’s income and wealth level affects how risky lenders think they are. That shapes their access to affordable credit, which affects whether they can make investments in income- or wealth-building assets. These investments then increase or decrease their income and wealth level, starting the loop again. This can help some people get richer, while others fall further behind.

Add reinforcing feedback loop - coming soon!

Cultural narratives often hide the reality of how financial systems reinforce wealth. Debt is frequently described as a personal failure, and borrowers are blamed when they fall behind. In the German and Dutch language, for example, the word Schuld means both debt and guilt. But when the rules and relationships are structured to benefit those with high incomes and wealth, the problem is not just individual behaviour, it is systemic design.

Governments often borrow money to pay for public services such as hospitals, schools, roads, or to respond to emergencies. They do this by selling bonds, which are promises to repay lenders with interest. These bonds are usually bought by banks, pension funds, insurance companies, and wealthy investors seeking steady income.

Countries in the Global North typically receive high scores (AAA, AA, or A ratings) from credit rating agencies. That means they can issue bonds at low interest rates. In contrast, many Global South countries receive lower ratings, such as BBB or even junk status. To attract buyers, these countries may offer higher interest rates, increasing their borrowing costs. If lenders sell their bonds because they lose confidence in, or just to lock in speculative profits, interest rates may rise further. Some very aggressive bond investors, known as bond vigilantes, put enormous pressure on governments to change spending or policy to ensure they can pay their debts.

Unfair debts have also been taken on by authoritarian rulers who borrowed money that rarely reached citizens. Some global banks lent large sums with little regard for repayment capacity. They expected that governments would prioritise paying debts over using national budgets for meeting the needs of the population, or that in case of trouble international financial institutions would bail out countries. In other words, banks were often not responsible enough in their lending.

Another issue arises from institutions like the International Monetary Fund (IMF) and World Bank. These organisations have offered loans to countries in return for strict economic reforms, known as structural adjustment programmes (SAPs). SAPs often require cuts to healthcare, education, and food support (Section 5.2.4) to reduce countries’ spending and ensure that loan payments can be made. These conditions frequently made it more difficult for countries to escape poverty or invest in the future. Such demands are less common now, but still haven’t disappeared. 

Can debt be redesigned to support people and planet?

Debt can help individuals, families, communities, businesses, cities and countries invest in their future. But only when the lending conditions are reasonable, power is more balanced between lender and borrower, and repayments do not undermine human and ecological wellbeing. Around the world, communities are finding ways to make borrowing more just. Some use rotating savings groups, where members take turns borrowing from a shared pool with no interest. Islamic finance avoids charging interest and focuses on sharing risk. Mutual credit systems link lending to contribution rather than profit.

There are also movements demanding change. Some campaign to cancel unjust debts, especially those made under corrupt or coercive conditions. Others are calling for new global finance systems to stop debt crises before they begin. Subtopic 6.3 (coming soon!) will explore how debt finance can better serve people and the planet. For now, it is enough to remember that debt is a system of rules, relationships, and power. How we shape those rules decides whether debt helps communities thrive or not.

Concept: Power

Skills: Thinking skills (transfer)

Time: 40 minutes 

Type: Individual, pairs, or group

Option 1: Comparing debt relationships

Time: 40 minutes - - each case could take about 5-7 minutes to discuss - if students have to write responses, then more time might be needed. If time is short, then the cases could be divided up among groups rather than each person or group exploring all of them.

Debt relationships are not all the same. Who lends the money, what it’s used for, and how the loan must be repaid can shape someone’s life for years. In this activity, you will compare five different cases. For each one, use what you’ve learned to answer the questions to explore how power and fairness work in debt relationships.

1. Who is the borrower? Who is the lender?

2. What is the loan used for? Will it help build assets or meet basic needs?

3. What are the repayment terms? Are they harsh or supportive?

4. What happens if the borrower cannot repay? Who decides?

5. Who has more power in this relationship? What gives them that power?

6. Do you consider this a fair form of debt? Why or why not?

Case 1: Community education loan in Kenya

A student borrows from a local cooperative credit union to pay university tuition. The loan has a low interest rate and flexible repayment. If the student cannot pay for a while, the cooperative offers support and adjusted repayment plans.

Case 2: Farm loan in the UK

A large farming business borrows from a commercial bank to buy machinery. The loan is low interest, and the business can use the farm buildings and land as collateral. If the loan isn’t repaid, the bank can claim those assets.

Case 3: Emergency loan in the Philippines

A single parent borrows from a payday lender to buy groceries and pay school fees. The loan is high interest, must be repaid quickly, and late payment leads to large penalties and possibly debt collectors.

Case 4: Government bonds in Bolivia

The Bolivian government sells bonds to international investors to fund public transport. The government agrees to repay the loan with interest over 10 years. If investors lose confidence, they may demand higher interest next time or sell the bonds early, driving up borrowing costs.

Case 5: Rotating savings group in Germany

A refugee-led community uses a rotating savings group, where each member contributes a small amount every week. One member borrows the full pot each time. There’s no interest, and members trust each other. If someone struggles to repay, the group discusses how to manage it.

Option 2: Country debt crises and risks

Time: 30 minutes

Debt Justice is a UK-based organisation that tracks debt crises around the world. Their map shows which countries are currently in debt crisis and which ones are at risk.

Instructions

1. Go to the Debt Justice interactive map.

2. Explore the map. Click on several countries and read the short descriptions.

3. Then answer the following questions:

• Where are most of the countries in debt crisis located? Are they clustered in any region?

• What about those at risk of public debt crisis or private debt crisis?

• Choose one country from each of the three categories. What kind of information is available when you click “More info”?

• Why do you think Debt Justice classified each country the way they did?

• What patterns or surprises do you notice?

• What questions do you still have?

Option 3: Systemic impacts of student loan debt (in the USA)

Time: 30 minutes

The Impact of Student Debt on the Low-Wage Workforce describes how student loans limit economic mobility, influence career choices, and deepen racial wealth gaps for low-income workers.

1. Read the article or scan the key points via the title link. Look for examples showing how student loans limit choice, income, and wealth.

2. In pairs, highlight 2–3 phrases that link student debt to job limitations, low income, or reduced economic mobility.

3. Choose 3-4 variables that form a reinforcing loop. Income or wealth is a good place to start.

4. On paper, arrange variables in a circle. Connect them with arrows showing cause–effect, and mark each arrow with + (direct) or – (inverse). This completes a reinforcing (R) loop that deepens inequality.

5. Describe how the loop shows how debt traps reduce social/economic mobility.

6. Discuss in pairs, small groups or as a class: What might break this cycle?

Ideas for longer activities and projects are listed in Subtopic 6.5

• ‘The greatest heist in history’: How Haiti was forced to pay reparations for freedom - An NPR article about Haiti’s 122-year debt repayment to France and its long-lasting economic effects. A compelling example of how debt can be imposed through power. Difficulty level: medium

• Debt Justice - Debt Data Portal -  An interactive map revealing which countries are in debt crisis or at risk, and the type of debt (public or private). A great resource for spotting global patterns and sparking systems thinking. Difficulty level: medium

• The Impact of Student Debt on the Low-Wage Workforce - Describes how student loans limit economic mobility, influence career choices, and deepen racial wealth gaps for low-income workers. Difficulty level: medium

• Many Young Adults Have Taken on Debt. It Could Jeopardize Their Financial Futures
  An article from the Urban Institute about how young adults are falling behind on credit payments, risking credit scores, and facing basic needs insecurity, showing how debt traps start early. The article focuses on young adults in the United States, but the impacts of early debt levels are relevant for young people everywhere. Difficulty level: medium

• Why the 1%’s Savings Buried the Middle Class in Debt (Chicago Booth Review)
  An article from Chicago Booth Review that explains how the rich’s surplus savings fuel debt for the rest, reinforcing inequality and creating instability. Difficulty level: medium

The CORE Econ Team. (2023). How do you live if you don’t work? In Unit 6: The financial sector - Debt, money, and financial markets. The Economy 2.0: Macroeconomics (Open access e-text). https://books.core-econ.org/the-economy/macroeconomics/06-financial-sector-01-how-do-you-live-if-you-dont-work.html

Debt Justice (n.d.). https://debtjustice.org.uk/

Graeber, D. (2014). Debt: The first 5,000 years. Melville House.

Hickel, J. (2017). The divide: A brief guide to global inequality and its solutions. William Heinemann.

Nievas, G., & Piketty, T. (2025). Unequal exchange and North-South relations: Evidence from global trade flows and the world balance of payments 1800–2025 (Working Paper No. 2025/111). World Inequality Lab.

Rosalsky, G. (2021, October 5). ‘The greatest heist in history’: How Haiti was forced to pay reparations for freedom. NPR. https://www.npr.org/sections/money/2021/10/05/1042518732/the-greatest-heist-in-history-how-haiti-was-forced-to-pay-reparations-for-freedom

Stropoli, R. (2021, May 25). How the 1 percent’s savings buried the middle class in debt: Research suggests that when the rich bank, the rest borrow. Chicago Booth Review. https://review.chicagobooth.edu/economics/2021/article/how-1-percent-s-savings-buried-middle-class-debt

Coming soon!