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Home Distance Learning

Privatize Federal Graduate Student Loans

saheli by saheli
January 9, 2017
in Distance Learning

Congresswoman Virginia Foxx (R-NC), the incoming chair of the House Committee on Education and the Workforce, recently expressed concern that the student loan program has grown too large and distortionary. Fortunately, there are plenty of ways to rein it in. One of the most promising? Eliminate all federal lending to graduate students and let the private market take it over. This would save taxpayers money and incentivize innovation in higher education.

The federal government offers two main types of loans for graduate school: Stafford loans, which limit borrowers to $20,500 annually, and PLUS loans, which have a higher interest rate but effectively no limits on borrowing. In 1995, the federal government originated or guaranteed $12 billion in loans to graduate students. That figure has since tripled to $36 billion (after adjusting for inflation). Over the same period, loans to undergraduate students rose “only” 119%.

Source: College Board, Trends in Student Aid

Source: College Board, Trends in Student Aid.

Congress would do well to eliminate loans to graduate students before the program grows too large and renders itself politically impossible to get rid of. It has pared back the program before—the Budget Control Act of 2011 eliminated the subsidized graduate loan program, which was more generous to borrowers than the programs in existence today. Now, six years later, Congress has the opportunity to abolish federal graduate student loans once and for all.

Time is of the essence, because graduate student loans may end up costing the federal government far more than originally anticipated. Graduate student loans generally carry a higher interest rate than undergraduate loans, which would seem to make graduate loans less of a budget drain. But new “income-driven” loan repayment plans allow borrowers to make payments based on their income. These plans decouple payments from interest rates—borrowers with the same income will make the same payment regardless of whether their interest rate is 3% or 6%. At the end of the repayment period (generally 20 or 25 years), the full remaining balance is forgiven—courtesy of taxpayers.

Recently, the Government Accountability Office estimated that these plans would cost the government $74 billion—and that’s only for loans that have already been issued. As interest rates rise, so will the government’s borrowing costs—but borrowers in income-driven repayment will be unaffected. If the program continues as is, the full cost could be exponentially higher.

Graduate student borrowers, with their high loan balances, have extra incentive to enroll in these generous repayment plans. The plans also create no incentive for graduate students to borrow less—since payments are the same regardless of your balance, why not take out more?

These borrowers also least need the help from Uncle Sam. Graduate degrees are lucrative—those with advanced degrees earn 26% more than those with only a bachelor’s degree and 107% more than those with only a high school degree. It is true that graduate students borrow the most, but their investment also has the best chance of paying off. Why should taxpayers, most of whom do not have advanced degrees, subsidize the doctors, lawyers, and businesspeople of tomorrow?

[Source:-Forbes]

Tags: FederalGraduateloansPrivatizestudent
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