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Piled Higher & Deeper

Graduate student debt runs out of control.
University Business, March 2012

Student borrowing is going up. National Student Loan Data System data shows that cumulative borrowing per student participating in federal loan programs increased from about $3,943 in 1990 to $11,510 in 2000 and $13,856 in 2009. Much of the increase is attributed to funding for graduate education, and recent changes in federal student loan policies for graduate students will likely cause this to go higher.

This will likely affect the entire campus. Enrollment may become a challenge, students may shun programs that lead to jobs with lower starting salaries, and alumni satisfaction may decline. Yet, graduate students are older than the average undergraduate  and are likely a little savvier about debt levels and career choices.

As of July 2012, graduate student loans will carry higher interest rates than in years past, and they won’t be subsidized. Another round of changes that increase borrowing costs are set for July 2013, and they won’t be the last. The reason is simple: The federal government is broke. “Undergraduate is seen as somewhat of an entitlement,” says student loan debt management expert Paul Garrard of PG Presents in West Virginia. Hence, the brunt of cuts go to those who are older and stand to make more money from their additional education. Garrad is also a consultant to NSLP, the nonprofit financial aid solutions provider.

Why Changes, Why Now

PLUS Loans, first made available to graduate students in 2006, allowed them to borrow the entire cost of education. For many students, this was welcome. Graduate school tends to have higher costs than undergraduate school, and there are fewer grants and scholarships offered. Many people walk off the commencement stage and into high-paying jobs, making the repayment burden relatively light.

Although PLUS loans have a wider range of repayment and forgiveness options than private loans, they come with a higher price in the current market. Graduate PLUS loans have a rate of 7.9 percent, currently above the prime rate or the London Interbank Offer Rate (LIBOR) usually used to price borrowing. Private educational lenders charge rates closer to prime and LIBOR, which makes them cheaper right now.

There are strict limits on how much money undergraduates can borrow, but not graduate students. Some people may borrow money up to the limit simply because they can, whether or not they need it.

Mark Kantrowitz, publisher of the financial aid websites and, says access to education is affected more by how much money people can get and when they have to repay the funds, rather than the rate being charged. However, rising undergraduate debt levels may affect graduate school enrollment when the recession ends. “Some data suggest that students who graduate from undergraduate school with no debt are twice as likely to enroll in graduate school as students who graduate with some debt,” he says. Furthermore, “every $10,000 in debt is associated with a 6 percent decline in choosing a public service career.”

The Council of Graduate Schools conducts an annual survey of pressing issues among its members. For 2011, the second most pressing concern was graduate student financial support, mentioned by 54 percent of the deans surveyed, especially those at doctoral and public institutions. “Year after year, for a decade or more, our deans report that one of their big issues is financing graduate education,” says Nathan Bell, director of research and policy analysis at the organization, adding that with some of the changes in that area being so new, “we haven’t seen any evidence of effects yet.”

The Council of Graduate Schools reported a small decline in academic program enrollment in 2010, but Bell says it was not statistically significant. Most of those declines were in business, education, and public administration programs where students tend to be self-supporting or sponsored by an employer.

At the master’s level, 44 percent of students have loans, 25 percent are funded by employers, and 20 percent have assistantships. At the doctoral level, half of students have assistantships, 32 percent have loans, and 13 percent are funded by employers. “With graduate student financing, there is no norm,” he says, because of the huge range of programs and student circumstances.

While Bell’s organization has no data on assistantships and fellowships, he says there is some anecdotal evidence that amounts are declining, especially at state-supported institutions. Deans appreciate the value of these funds and work to defend them when they are facing budget cuts, he notes.

Ripple Effect

Changes to graduate borrowing programs coupled with increased debt loads from undergraduate education have the potential to disrupt the status quo across campus. Enrollment may not have changed, but graduate borrowing has affected alumni relations and, on some campuses, the role of graduate assistants.

Undergrads generally borrow money for four years, Garrard points out, but individual graduate programs have very different durations. A standard MBA program is two years, while a PhD student may be borrowing funds for six years. Medical students, who often borrow heavily, are likely to be hit especially hard.  “The elimination of the subsidized Stafford loans costs about $32,000 for medical students,” says Elizabeth Wiley, a fourth year student at the George Washington University Medical School and vice president for internal affairs with the American Medical Student Association.

Kantrowitz says there is a moral hazard problem with graduate debt that can exacerbate the debt burdens. There are strict limits on how much money undergrads can borrow, but not graduate students. Some may borrow money up to the limit because they can, whether or not they need it. “It’s very difficult for an undergrad to obtain six-figure debt for an education,” Kantrowitz says, but those amounts are common for law and medical students.

Some graduates are angry when they realize how much they owe and how weak their employment prospects are right now, even before the loan changes kick in. “It’s starting to fall back on reputations at schools,” says Kate Trombitas, vice president of financial education at NSLP. “Students are starting to complain about it.”

They’ve been especially vocal at law schools, where unhappy alumni sometimes put their education to work against their alma maters. In August 2011, seven graduates of Thomas M. Cooley Law School in Michigan and New York Law School in New York City filed class-action suits, arguing that the schools induced students to borrow heavily for tuition by misrepresenting the opportunities and salaries available to their graduates.

Financial issues have led some graduate assistants to unionize. Cayden Mak, chief steward of the Graduate Student Employees Union and an MFA student at the University at Buffalo (N.Y.), says that people enrolling in graduate school for an academic degree expect to work hard for very little money.

However, many of his classmates are shocked to find out that their stipends do not go far and that assistantships cover tuition, not fees. In New York, Mak says, the legislature has to approve tuition increases, but the campuses can charge fees without legislative approval to supplement tuition revenue. In his experience, many graduate students at UB are eligible for such public aid as heating assistance in the winter, and they end up taking out loans despite treacherous job markets in their fields of study.

Alternatives to Debt

Other than assistantships for those like pursuing academic specialties, scholarships and grants are rare for graduate students. As more campuses review enrollment of underserved populations and of student career choices, anecdotal evidence shows that more funds are being allocated to other forms of aid.

For example, the University of St. Thomas in Minneapolis announced in November of 2011 a program to give 15 full-
tuition scholarships to under-represented minority students who study for an MBA at their Opus College of Business. Other institutions have set up scholarship programs for students who study public-interest law, devote their MBA program to non-profit management, or plan to pursue work as a primary-care physician.

“It’s a common misperception that a graduate or professional degree equals success. In a market like this where jobs are very scarce, it’s more important for students to understand what they are getting into,” Trombitas says.

Alternatives, or at least a clear explanation of the implications of debt, may be especially important for people outside of the professional fields, Kantrowitz says. An MBA student is likely to know very well the implications of debt, but someone working on a PhD in English may not. People who want to pursue their dreams may need a shift in mentality, he says. “If you have too much debt, you can’t pursue your dreams anyway because you need to repay your loan.”

Medical students have long been aware of the cost of debt, which has created shortages of physicians in low-paying fields like primary care and pediatrics. Following the generally accepted financial aid guideline that debt at graduation should be less than the first-year starting salary, many new doctors are seeking out highly paid specialties. The Affordable Care Act has expanded the funds available to the National Health Service Corps, in which physicians agree to work as primary-care physicians in underserved areas in exchange for a salary that’s competitive in the region where they work and then qualify for up to $30,000 a year in student-loan forgiveness. 

Is it enough? “The National Health Service Corps has a great record of trying to encourage people to go into primary care,” says Wiley of the American Medical Student Association. “But at the end of the day, the financial incentives are not enough to offset $150,000 or so in debt. The financial incentives need to reflect the amount of debt that people have today.”

Campus leaders will need to work on strategies to respond to the issues they face, as borrowing programs for graduate students are unlikely to become more generous. The outlook is for more cuts to graduate student loan programs as the federal government tries to reduce spending, so campuses will need to respond with more financial aid, smaller tuition increases, or changes in enrollment expectations. “In these types of economic times,” Wiley concludes, “it’s difficult to lobby to improve the situation.”

Ann C. Logue is a Chicago-based writer who specializes in covering finance.