Graduate School Borrowing: Unique Challenges and Impacts       

ScholarNet Blog Articles | March 31, 2020

While 19% of college students are graduate students, they represent 40% of the student loan debt. Candidates and policymakers who focus on making undergraduate degrees affordable may solve one problem, but the bulk of student loan debt – and problems it creates – will remain.

In the news, we hear about the average student loan debt of roughly $30,000, but those who work in financial aid know that just applies to undergraduates who borrowed to pay for their degree. According to an analysis of Federal Student Aid statistics in a Center for American Progress article, graduate students were 19% of all college borrowers, but they borrowed 40% of the total money borrowed. When we hear about the borrower with $250,000 in student loan debt, they’re not the anomaly we think: grad students are often carrying $80,000, $150,000, and even $250,000+ in debt.

While many Presidential candidates and policymakers focus on making community college or an undergraduate degree at a public college affordable, there are other policies and factors related to graduate school borrowing that led to a crippling $1.6 trillion in student loan debt. While fewer graduate student loan borrowers default on their student loans than other groups, many of them are saddled for decades with debt that impacts their quality of life – life choices regarding marriage, home purchase, saving for retirement, and other investments. How did we get here with so many borrowers, and what are some of the options for setting us on a better path?

First, let’s look at what’s different about graduate school loans.

No Loan Limits on Federal Graduate Loans

Unlike federal undergraduate loans, which have annual and aggregate limit caps on how much students can borrow, no caps exist for grad school borrowing. Undergraduate borrowers can access as much as $31,000 in federal funds over their college career if they’re a dependent student or $57,500 if they’re financially independent adults.

Grad students can borrow $20,500 per year and $138,500 through one loan program, and if they need more than that, they can access the grad PLUS program. With grad PLUS loans, students can borrow up to the full cost of attendance charged by the college minus any other financial aid received. When you read about the borrower who has $300,000 in student loan debt, it’s generally someone who borrowed loans for one graduate degree and either completed it or didn’t, before changing to another graduate degree – all while borrowing more loans.

Worse Loan Terms than Undergraduate Loans

If you have a federal loan disbursed today for your grad school loans, the interest rate is substantially higher than for someone with undergrad loans. The rate for loans disbursed through June 30, 2020 is 5.05% for undergraduate Direct loans, while it’s 6.6% for Direct Unsubsidized loans for graduate or professional students. If you’ve already maxed out your Direct loans for grad school and you needed to borrow grad PLUS loans, the loan you have disbursed today has an interest rate of 7.08%.

Student loan fees are also significantly higher for PLUS loans than other loans: Direct Subsidized and Direct Unsubsidized Loans disbursed today (and through June 30, 2020) would have a loan fee of 1.059% deducted from money the borrower receives. A grad PLUS loan disbursed today (through June 30, 2020) would have a loan fee of 4.236% deducted from the disbursement. For more on rates and fees of various types of federal student loans, see the website.

Managing Unfavorable Terms in Repayment

Smart borrowers quickly do a Direct Consolidation loan so that they can qualify for one of multiple repayment plan options in repayment, allowing them greater flexibility and a chance at a reduced rate while still allowing them federal borrower benefits. Those who seem unlikely to ever be able to repay their debt may sign up for an income-driven repayment plan so that they can eventually qualify for loan forgiveness after 20 or more years of making payments (unless they work in the public sector and qualify for other loan forgiveness). Even with the prospect of loan forgiveness, they may find themselves making payments and seeing their balance go up for a while – and under current law, their eventual loan forgiveness will be taxable. According to data, more than 40% of loan balances over $60,000 are in income-driven repayment plans, with interest growing and negative amortization becoming a very real possibility.

For those borrowers with a stable job, high income, and good credit, refinancing with a private lender may offer the fastest way out of debt. If things change and they can’t make their payments? They’ve lost federal borrower benefits and could find themselves in serious trouble.

Less Accountability by Institutions for College Success

The nearly limitless federal lending has made it possible for schools to offer degrees with price tags that are wildly out of balance with expected earnings. Consider an example raised in a Washington Post article that noted a master’s in social work with a median debt of $115,000 and first-year earnings of just $50,000. The U.S. Department of Education has all but phased out the gainful employment rule instituted under Obama for vocational schools, which measured the school’s ability to provide students with an education that was adequate enough for them to pay back their student loans so they would be gainfully employed. Schools not meeting the minimum level were denied access to federal financial aid resources.

Something akin to gainful employment has been proposed for graduate-level borrowing. The challenge of enforcement for so many types of degrees is one issue. And the issues facing those graduating with various types of credentials are so different. In fact, let’s look at the borrowing more closely.

Average Grad School Debt in the U.S. used National Center for Education Statistics to review the average cumulative debt taken on by graduates of various degree programs. It found that a graduate with a Master’s in Education typically accumulates about $55,000 in debt, while an MBA graduate leaves school with an average student loan debt of $66,300. Typical law school debt is $145,500, while medical school typically leaves graduates with $246,000 in debt, on average. Factors such as job prospects, starting income, and overall income potential vary greatly for these credential types, making quality of life and the possibility of loan repayment vastly different experiences for people who have grad school debt. Until a better method of accountability is found, the Center for American Progress report makes several suggestions to ease the cost of education and loan repayment for specific credentials.

Equity Issues

The Center for American Progress report found that Black and Latino grad students are more likely to go into debt than white peers, and to have higher total debt. Black students’ median federal debt for grad school was 25% higher than that of their white counterparts, with a total federal debt that was $25,000 higher. The numbers for Latino students were closer to their white peers – 82% compared with 75% borrowing for undergraduate school – they ended up with $5,000 more in total federal debt. African American and Latino students borrowed more money than white students at every point in their education.

Many people of color obtain graduate degrees to compete with white students who hold bachelor’s degrees, but they compound debt they took out for undergraduate studies. As candidates and policymakers consider ways to make grad school borrowing more in line with the income expected with its attainment, it’s clear that any policy that seeks to limit debt for graduate and professional credentials needs to recognize equity issues.

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