Suffice to say, I got a few angry responses after my last piece on student debt. Which is understandable: When you argue that it’s perfectly fine for the government to make billions in profits off loans to graduate students, a few people—namely, indebted graduate students—are going to take umbrage. And since I plan to write about education finance pretty frequently in this space, I wanted to spell out my point in a little more detail.
So to recap: If you trust the government’s accounting (which some don’t), the Department of Education is slated to make almost $150 billion over the next 10 years from new direct student lending, before administrative costs. About three-quarters of those profits will come from grad schoolers, even though they only borrow about one-third of all federal loan dollars. One reason those returns are so robust is that graduate students pay higher interest rates than undergraduates.
And that’s not a problem. There’s no commandment decreeing that grad students are entitled to dirt-cheap loans.
If you assume that Washington is morally obligated to keep the cost of all higher education—from Harvard Law to Spokane Community College—as low as possible, then yes, the idea of netting a profit on graduate students, or any students, might seem repellant.
But that’s not really what student lending was designed for. Rather, its underlying idea has always been to correct market failures for the sake of the public interest. Take undergraduates. As a country, America is healthier economically and socially with a well-educated citizenry. Moreover, a bachelor’s degree (or an associate’s degree in a technical subject like factory machining) has basically become a prerequisite for any kind of financial security. But college is pricey. And from a bank’s perspective, the typical freshman is not a particularly enticing loan candidate unless the bank can charge mountainously high interest rates or get the government to back the debt.
In part, that’s because new college students have a nasty habit of dropping out of school—just over half of first-time bachelor’s students finish their degree within six years—and eventually defaulting on their loans. Even if they do graduate, they’re not guaranteed a high paying job or constant employment, especially in the first years off campus.
So undergrads are risky bets, and, worse yet, they’re risky bets who don’t have any collateral to offer, because you can’t foreclose on class credits. Poor and lower-middle-class students—the ones we especially want in college because that’s their best shot at scaling the economic ladder—are especially risky, because they’re least likely to finish school. Were it left entirely to the private sector, those low-income kids would be asked to pay the most in order to borrow for an education, if they could get loans at all.
Sound fair? I thought not. That’s why it makes sense for the feds to step in. It also makes sense for the feds to offer cheap terms. First, while we want people to go to college, it can be a serious gamble, especially for the poor (again, think about those graduation rates). Second, if we think of college as a key path to economic mobility, it doesn’t make sense to later saddle less fortunate borrowers with high monthly payments, when we’d like them to be saving and building up a solidly middle-class lifestyle. Thankfully, the government can borrow at low, low Treasury rates, lend out the money at reasonable interest, and still only take a small loss on direct undergraduate loans. Part of the reason Washington roughly breaks even on the deal (again, assuming you trust the government’s accounting), is that it socializes the risk by lending both to fairly well-off undergraduates who are sure investments—think a kid whose parents make $200,000 a year attending the University of Pennsylvania—as well as the riskier, poorer students striving to get a degree.
(A quick digression: One might argue that instead of subsidizing debt, the government would be better off restoring a truly inexpensive system of public undergraduate education by, say, directly funding state college systems. Alas, one can only daydream.)
Now back to the graduate school crowd. Obviously, the country needs doctors, lawyers, biologists, and MBAs. But in contrast to undergraduate education, there’s a far weaker case for asking taxpayers to subsidize the cost of an advanced degree.
First, attending grad school is hardly a universal rite of passage. Only 11 percent of Americans under the age of 40 have a master’s or more, whereas over 60 percent have at least taken some college courses.
Second, on the whole, holders of graduate degrees tend to do quite well financially. As this graph from the BLS shows, they have exceptionally low unemployment, and earn high average wages.
Third, the private sector could probably fund much of graduate education on its own. Compared to undergrads, advanced-degree seekers are far less risky borrowers. They’ve already demonstrated the ability to complete one four-year degree. They’re usually heading for a particular profession, so it’s possible to make a decent prediction of their future incomes. Again, they frequently make a ton of money. And while they do default sometimes, they appear to do so far less often than undergrads. (The Department of Education doesn’t offer wonderful data on this front, but at least one reasonable estimate found the three-year default rate for advanced-degree holders was half the rate for B.A.’s. That’s about in keeping with some of the Department of Education’s own comparisons between Stafford loans, which mostly go to undergraduates, and PLUS loans, which largely go to graduates).