The budget cuts accompanying the deal to raise the debt ceiling included elimination of the in-school interest subsidy on federal loans to graduate students. Relief over the preservation of the maximum Pell Grant has overshadowed this change, but references to it reveal considerable confusion over what it really means. We want to clarify this issue, particularly because our 2008 Rethinking Student Aid recommendations are frequently referenced in this context.
In 2009-10, 1.6 million graduate students borrowed $25.3 million in federal Stafford Loans—an average of almost $16,000 per borrower. Only 15% of graduate borrowers had exclusively subsidized Stafford Loans. A few of the others had only unsubsidized Staffords, but most had some combination of the two. About 40% of the Stafford Loan dollars were in the subsidized program. The other 60% did accrue interest while the students were in school. In addition to Stafford Loans, graduate students borrowed another $5.3 million dollars from the federal government through the GradPLUS program. Students can borrow up to the cost of attendance less other financial aid through this program, but the interest rates are higher than those on Stafford Loans—and interest does accrue from the time the loans made.
Overall, about one-third of federal graduate student loans come from the subsidized Stafford program. It is these loans that are affected by the change. Interest will now accrue on all federal loans to graduate students instead of on two-thirds of those loans. The availability of loans won’t be affected. The issue is that when borrowers leave school, unless they have paid interest while in school, students will owe more than they otherwise would have. A student who borrowed the 2009-10 averaged subsidized amount of $7,171 at the beginning of each of two years of graduate school would owe about $15,838 instead of $14,342 based on 6.8% compounding interest. She would face monthly payments of $182 instead of $165 over a 10-year standard repayment period. Students who are in school for longer periods of time–including most medical and law students–will lose a bigger benefit. For those in shorter graduate programs, the subsidy matters less.
No doubt the student would be better off with the subsidy. But there are a number of reasons not to put her problems at the top of the federal priority list. The loan subsidy is clearly not big enough to prevent graduate students from getting over their heads in debt or to solve the problems of those whose degrees never pay off. Fortunately, there is a more effective mechanism in place–Income-Based Repayment (IBR). Under this program, students are not required to make payments on their federal loans until their incomes exceed 150% of the poverty line and payments are limited to a fraction (now 15%, soon 10%) of the amount by which their incomes exceed this level. So if their incomes are not high enough to make the new higher loan payments manageable, they will be protected. (The protections could be stronger, but that discussion is for another day.)
A key difference between the in-school subsidy and the subsidy provided through IBR is that the former depends on financial circumstances (and tuition levels) before graduate school, while the latter depends on financial circumstances after graduate school. A student who–like most graduate students–lacks the ability to pay up front may end up with a very good salary after graduation. This is especially likely for students in professional education. It is much more equitable to ask those who can make the payments to do so and to target the subsidies on those for whom the payments would be most difficult.
We are strong advocates of subsidies for students and know that the benefits of education accrue to all of society–not just to the students in question. That said, graduate students by definition have bachelor’s degrees and are hardly the population in our country most in need of assistance. They are engaged in education and training designed to lead to more lucrative careers–and those with graduate degrees earn far more than the average taxpayers who are paying for the subsidies they receive. We should focus on reducing the financial barriers to college for all qualified students and on the other vital needs of disadvantaged people in our society. Graduate students are a vital part of our economic future. But this relatively small change in their financing mechanisms will not change that.