Unlimited Federal Loans For Graduate School Drive Up Tuition

It is impossible to discuss the federal student loan system without mentioning graduate student debt, which now accounts for 47% of new student loans originated every year. Unlike undergraduate loans, federal loans to graduate students have no effective cap—students may borrow as much as their university allows them. Observers, including myself, have long suspected that unlimited loans to graduate students drive up tuition with little offsetting benefit. A new study provides confirmation.

New research by economists Sandra Black, Lesley Turner, and Jeffrey Denning finds that the introduction of unlimited graduate lending induced universities to hike tuition for postbaccalaureate programs. Students paid for the tuition hike by taking out thousands of dollars in new loans from the federal government. However, unlimited lending had no impact on enrollment in graduate programs or other outcomes such as degree completion and long-run earnings. Unlimited graduate student lending has undoubtedly been a failed policy.

Research confirms graduate student loans drive tuition inflation

Prior to 2006, federal graduate student loans were capped at $18,500 per year for most students. That year, however, Congress created the Grad PLUS loan program, which allowed graduate students to borrow above the $18,500 limit, up to their program’s total cost of attendance (as defined by the university). In practice, this meant that federal graduate student loans became effectively unlimited.

Black, Turner, and Denning exploit this change to evaluate the impact of Grad PLUS on tuition and other factors. The authors compare programs where most students borrowed close to the $18,500 limit prior to 2006 to programs where most students borrowed less. The effects of Grad PLUS should be concentrated among the former group, where most students were already pressing up against their loan limits. By comparing the outcomes of the former group with the latter, the researchers can isolate the effect of Grad PLUS.

Among their findings:

• Students borrowed more. Students in programs affected by the graduate loan expansion borrowed an additional $6,159 from the federal government, compared to the reference group. Some of that increased federal borrowing was offset by a decline in private student lending. However, overall borrowing (federal and private combined) per student still increased by $3,596.
• Universities hiked tuition. Colleges took advantage of increased federal loan availability to raise their prices. The researchers’ analysis suggests that for every $1 increase in federal lending after Grad PLUS was created, net tuition rose by 64 cents. There is suggestive evidence that net tuition for underrepresented minority and first-generation college students increased faster than the average in response to Grad PLUS.
• Access to graduate education was unchanged. Programs more affected by graduate loan expansion did not see significant increases in enrollment relative to the reference group. Nor did Grad PLUS improve access to graduate education for underrepresented groups; if anything, the share of white students in affected programs increased. Similarly, the researchers find no significant effects of Grad PLUS on degree completion or long-run earnings outcomes.

“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.”

Should Grad PLUS loans even exist?

The traditional case for unlimited federal lending to graduate students runs as follows: Graduate education increases students’ earnings, but the private market fails to provide adequate financing for graduate school, particularly for disadvantaged students. Therefore, the federal government needs to step in and provide loans directly. If students repay their loans with interest, taxpayers might even come out ahead.

The paper’s findings cast serious doubt on that narrative. It appears that both students and taxpayers are getting a raw deal from Grad PLUS.

Graduate students are paying more, but forking out for higher tuition hasn’t improved the quality of graduate education: the authors find little impact of Grad PLUS on access, completion, or long-run earnings after graduation. Student debt levels, however, are going up. In 2004, master’s degree completers graduated with $41,090 in debt, on average. By 2016, average debt had risen to $55,540 (a 35% increase after inflation).

Rising debt levels have led to more political pressure for student loan forgiveness. In 2007, Congress created the Public Service Loan Forgiveness program, which discharges the loans of government and nonprofit workers, including effectively-unlimited Grad PLUS loans. Later, the Obama administration oversaw several expansions of income-driven repayment plans, which allow student borrowers to slash their monthly payments and discharge unpaid balances.

As a result, the Congressional Budget Office expects Grad PLUS loans to cost taxpayers $22 billion over the coming decade (under fair-value estimates). That figure does not account for the Biden administration’s plans to forgive up to $20,000 in debt per borrower, nor its proposal to further expand income-driven repayment.

The main presumed benefit of Grad PLUS—increased access to graduate education—may also be a fiction. The researchers find no significant impact of Grad PLUS on enrollment, which suggests that the limited federal graduate loan program that existed in 2006, combined with a robust private market, adequately met demand for graduate education finance. Private lenders were glad to lend to students enrolled in high-return graduate programs; most students even enjoyed lower interest rates in the private market than Grad PLUS offered.

A caveat applies: the study’s research design can only determine how Grad PLUS affected enrollment in existing graduate programs; it cannot tell us whether Grad PLUS induced universities to create brand-new programs. This may have occurred: one analysis found that schools added 9,000 new master’s degree programs between 2011 and 2021, when Grad PLUS was active.

However, if universities added those programs only once Congress removed the limits on graduate student lending, many or most of those programs likely would not receive financing in the private market. That in turn suggests that many new master’s degree programs are solely being propped up by federal subsidies instead of providing real economic value. My own research finds that 40% of master’s degree programs do not increase students’ earnings enough to justify the cost of tuition.

Grad PLUS benefits universities, but few others

Unlimited federal lending to graduate students seems to have plenty of downside and little upside. The downside is that students face higher tuition and a larger burden of debt. The upside is that wealthy universities get to pad their budgets with extra money from taxpayers. The answer is clear. To arrest tuition inflation and restore a bit of private-market discipline to student lending, Congress should eliminate Grad PLUS loans.