A Graduate Student Burden

The end of subsidized graduate loans in an era of declining resources means students will have to bear much of the increased costs.
August 17, 2011

WASHINGTON -- For most advocates for student aid, the biggest casualty in the debt ceiling compromise reached by President Obama and Congress last month represented the least bad option: a change that would make graduate students responsible for the interest that accrues on their loans while they’re in school but leaves Pell Grants and other financial aid programs untouched (for now).

But for graduate schools, the cut presents a challenge: how to help students and encourage enrollment as state and federal resources decline.

The move eliminates subsidized federal loans for graduate students -- loans, distributed by need, on which the government paid the interest that accrued while students were enrolled in school. The cuts will save the government about $18 billion over 10 years. The change won't reduce the amount that students can borrow, but it will shift about $125 billion from subsidized loans to unsubsidized loans.

The final decision to eliminate the loans is so recent that officials at many graduate schools said they haven’t determined what, if anything, they’ll be able to do to provide more aid to students when the cuts take effect in 2012. Still, the combination of declining state aid and possible cuts to federal research spending makes it unlikely that they will be able to offer significantly larger stipends or grants to offset the added interest.

“Given our own limited budget situation, I can’t see how we’re going to be able to respond immediately,” said Patrick Osmer, vice provost and dean of the graduate school at Ohio State University and chairman of the Council of Graduate Schools. While Ohio State is still determining how students will be affected and what the university's response will be, “we’re just working through our budget constraints ourselves,” he said. “I think it’s just going to be something that people have to absorb.”

Congress voted to cut the subsidies as part of the final, last-minute deal to increase the debt ceiling on Aug. 2, but the eventual elimination of subsidized graduate loans had been all but certain since February, when President Obama proposed the cut to protect Pell Grants and other student aid programs in his budget plan for the 2012 fiscal year. Keeping the maximum Pell Grant at $5,550 was the administration’s top priority, and ending subsidized loans for graduate students was seen as the most palatable option.

Just over one-third of all graduate students took out a subsidized loan in 2007-8, the last year for which complete data are available through the National Center for Education Statistics. The average loan was $7,100, not far short of the maximum $8,500. Students pursuing law and medical degrees borrowed at the highest rate -- more than 70 percent.

Graduate students and schools, and their advocates, say they fear the change will discourage students from pursuing an advanced degree. "You're going to see more individuals who decide not to go back to graduate school," said Mary Winn, the legislative concerns chair of the National Association of Graduate-Professional Students and a graduate student at the University of California-San Diego. "Graduate students really promote innovation," and a drop in the number of students who enroll will make the U.S. less competitive, she said.

Still, students in math, science and engineering are more likely to get a fellowship or tuition reimbursement to absorb at least some of the cost, Winn said. Students pursuing professional degrees, such as law or medicine, and those getting Ph.D.s in the humanities and social sciences, who are more likely to finance the majority of their own education, will be most affected by the cuts.

For medical students, who not only tend to take on the most debt but frequently defer their loans or go into forbearance while they are continuing their training through residencies, the interest will accumulate quickly, said Matthew Shick, senior legislative analyst for the Association of American Medical Colleges. The association estimated that the change will cost the average medical student who has federal loans $10,000 to $20,000 more over the life of the loan.

But most medical schools aren’t likely to adjust financial aid to make up the difference, just as they would not if the interest rates on federal loans increased, Shick said. “I think this will be viewed probably from the financial aid perspective as a change in the terms of the loan,” he said. Since subsidized borrowing is capped at $65,500 for undergraduate and graduate studies combined, most medical students already take out unsubsidized loans to cover the bulk of their costs, he said.

Medical students have one other advantage in borrowing: their program is time-limited. Although a relatively small proportion of Ph.D. candidates borrow -- less than 30 percent, excluding Ph.D.s in education -- the uncertain length of Ph.D. programs means that those students who do borrow will be hit hard, said Lisa Tedesco, dean of the James T. Laney School of Graduate Studies at Emory University. Students who have to learn another language to complete their studies, or spend significant time abroad working on international collaborations, frequently borrow more to cover more years or more expenses, she said.

Emory has an emergency loan program that can cover up to $1,000 for unexpected expenses, and Tedesco said she expects more students will draw on that. The university also hopes to increase stipends to offset the additional loan costs -- but that would mean that programs might be able to admit fewer students because of the added expense.

“We might see students choosing to stop out or not come to graduate school, which depletes the talent pool,” she said, adding that she feared that first-generation college students would be disproportionately affected, because those students previously relied at least in part on subsidized loans and might be afraid to accumulate even more debt.

The American Psychological Association has not yet analyzed the impact of the legislation on its members' graduate programs, but said the change was a “real concern for graduate education in psychology,” in part because psychologists tend to have lower starting salaries than students with other advanced degrees, and the increased debt might be more daunting.

“Our association does have a concern that the elimination of the federal support for graduate students, especially for those most in need, might create a real barrier for those who want to enter the field,” Cynthia Belar, the APA’s executive director for education, wrote in an email.

For those graduate schools that compete for top-tier students, the loss of the loan subsidy adds another way for universities to make an offer, Tedesco said.

“We have to sharpen ourselves on all fronts to make sure our students are really well-served,” she said. “It’s really just going to put a lot more pressure on the system.”


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