Why is graduate school so expensive?
Also: Awaiting the Gainful Employment rule, and the government prepares to resume student loan payments.
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According to the Congressional Budget Office, graduate students will account for 48 percent of new federal student loans issued in fiscal year 2023. While the typical four-year college graduate has about $28,000 in federal loans, graduates of master’s degree programs owe over $55,000 and graduates of professional programs owe a whopping $190,000. Runaway student debt is increasingly a graduate-school phenomenon.
Unlike undergraduates, graduate students may borrow effectively unlimited amounts from the federal government. This was not always the case: graduate student loans used to be capped at $18,500 per year. But in 2006, Congress created the Grad PLUS loan program, which allows students to borrow up to the cost of attendance as defined by their university. Federal lending skyrocketed, as I describe in my latest post at Forbes.
How unlimited student loans drive up tuition
New research by economists Sandra Black, Lesley Turner, and Jeffrey Denning examines the effect of Grad PLUS on borrowing and tuition. In the years immediately following the creation of Grad PLUS, students more affected by the change increased their borrowing by more than $6,000. Universities captured most of those additional funds by hiking tuition for graduate programs: 64 percent of the additional loans went straight into institutional coffers.
Defenders of Grad PLUS sometimes argue that disadvantaged students need unlimited federal loans to afford graduate education. But the authors also find that access to graduate programs did not rise following the creation of Grad PLUS. Neither did the loan expansion increase racial diversity. In fact, the authors find evidence that minority and first-generation college students faced even steeper tuition hikes than the average.
Here at FREOPP, we’re concerned with whether higher education—including graduate school—yields a financial return for students. My research shows that 40 percent of master’s degree programs do not generate an increase in earnings large enough to justify the cost of tuition. Grad PLUS may leave students worse off if they graduate with loads of student debt they cannot repay. Indeed, the authors find that Grad PLUS increases debt burdens but has no impact on earnings, meaning students’ capacity to repay loans goes down.
“The implementation of Grad PLUS loans seems to have benefitted students very little in terms of human capital accumulation, suggesting that, prior to the implementation of Grad PLUS loans, few students faced binding credit constraints,” the authors conclude. “Our results raise important questions about the utility of essentially uncapped government-backed loans for graduate school.”
Indeed, other studies show that the private market was easily able to meet graduate students’ need for credit prior to Grad PLUS—assuming those graduate students enrolled in programs that increased their earnings potential and did not leave them with unpayable debt. After Grad PLUS, though, universities created lots of expensive new programs—including Columbia University’s $107,000 master’s in data journalism and the University of Southern California’s $115,000 online master’s in social work—that few private lenders would see as a good investment.
Eliminating Grad PLUS and restoring a commonsense cap on federal graduate student lending would arrest graduate school tuition inflation and significantly constrain universities’ ability to create cash-cow graduate degree programs that provide little economic mobility for students. The change would also save $22 billion over a decade. There are few no-brainers in policy, but ending Grad PLUS is certainly one.
What I’m writing
Grad PLUS mostly benefits wealthy universities. Students and taxpayers might see downsides from Grad PLUS, but America’s elite universities see nothing but upside. At OppBlog, I show that schools with more resources are likelier to make use of the Grad PLUS loan program. Schools with endowment assets exceeding $50,000 per student enroll 29 percent of graduate students, but draw nearly half of Grad PLUS dollars. The biggest winner from Grad PLUS is the University of Southern California, which takes in more Grad PLUS dollars than all Historically Black Colleges and Universities (HBCUs) in the nation put together.
How will the Gainful Employment rule impact higher education? The Biden administration will drop its Gainful Employment rule soon, a regulation which aims to defund for-profit colleges and career schools where student debt is excessive relative to earnings. While the rule is a step towards greater accountability for higher education, it includes massive carve-outs for degree programs at public and private nonprofit universities, and it might inadvertently shut down some quality vocational programs. I argue that the Biden administration should ditch the carve-outs and revamp the rule’s accountability metrics to better target programs with a low return on investment.
What I’m reading
Restarting federal student loan payments after a three-year pause could be a mess, Politico’s Michael Stratford reports. Congressional Republicans had offered to increase funding for student aid administration, on the condition it not be used to implement mass debt cancellation. But lawmakers failed to reach a deal, so administrative funding remained flat. The Department of Education then cut reimbursements to loan servicers, who are now reducing call-center hours. Brace yourself for a chaotic few months when (if) payments resume this fall.
Colleges could soon face a wave of borrower defense claims, warns attorney Jonathan Helwink in Inside Higher Ed. The borrower defense program allows students to discharge their federal student loans if their college defrauds or misleads them—and the college must compensate taxpayers for the discharged amounts. The Biden administration revised the rules last year, with an important change that will allow third parties to file mass borrower defense claims on behalf of students, sometimes without their knowledge. Colleges should prepare for a “new normal” on borrower defense.
Starting at a community college and transferring to a four-year institution rarely works out, Collin Binkley of the Associated Press reports. Just one in seven students are able to finish a bachelor’s degree this way. One reason? Four-year universities often reject transfer credits from community colleges. Students who attempt to transfer credits typically lose a full semester’s worth of coursework, or more. This is one reason why I’ve argued that free community college won’t meaningfully increase degree completion.
Taxpayers will lose 20-25 cents for every dollar in newly originated student loans under President Biden’s new income-driven repayment plan, the Congressional Budget Office estimates. The agency previously figured that the new repayment plan will cost $276 billion over a decade, assuming the Supreme Court strikes down the administration’s loan-cancellation initiative.
What I’m doing
I celebrated my 30th birthday last weekend with a day hike in Shenandoah National Park, where the spring wildflowers were in full bloom. I couldn’t identify this one in the field, but I typed a description into Google Bard, which thinks it’s a pink trillium. Can any humans confirm?
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