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).
There is, however, a big fly in the free-market ointment: public service. Governments and nonprofits need lawyers, teachers, and competent managers. But because Americans don’t like to pay public sector workers very much, their salaries are frequently nowhere near high enough to cover the cost of graduate loan bills while also maintaining a reasonable standard of living.
Take teachers. Today, about 27 percent of master’s degrees are granted in education. Among those M. Ed.s who take out loans for their graduate studies, the median borrower finishes $35,000 in debt, not counting undergraduate loans. Meanwhile, the average salary for a public school teacher with a master’s is $58,000. That’s not much money if you’re shouldering, say, a $400 monthly loan payment.
Or take law school. It would be infinitely more difficult for the federal government, much less local government, to recruit and keep good attorneys on the salaries it pays without some kind of loan forgiveness. (Full disclosure: I’m engaged to a New York City prosecutor who borrowed for school.)
Again, all this might not be a problem if graduate education had never become so expensive to begin with, but that cork is probably out of the bottle for good.
So the government has some interest in making sure public servants have forgiving loan terms. Because we generally don’t like it when hordes of young borrowers start defaulting, the government also has some interest in making sure that people who pursue a graduate education have a safety net in case the market for their degree suddenly dries up. Going to law school in 2006 may have seemed like a brilliant idea, for instance. But it seemed far less brilliant by the time those students graduated mid-recession in 2009, loan bill in hand.
These are reasons why lending to graduate students, and providing forgiving terms for those who truly need it—such as income-based repayment and public service loan forgiveness, which let government and nonprofit workers write off their debts tax free after 10 years of payments—make a lot of sense.
It does not, however, make a lot of sense to subsidize the educations of the many, many graduates who matriculate straight into a lucrative career. To put it another way, why would you want to give an MBA (who make up 26 percent of master’s degrees) working at Goldman Sachs a break on their interest? Why would you want to cut a corporate lawyer an even better deal? Given that some of these students already make pretty ideal borrowers from a bank’s perspective, you’d expect Wells Fargo and Sallie Mae to swoop in with lower rates and pick them off more often if Washington were truly offering them terrible terms. Making them even sweeter would just mean redistributing income upward.
You might be wondering: Why not just jack interest rates even higher? Well, if the government is going to be playing bank, I’d argue it ought to keep rates low enough to avoid losing the most reliable borrowers to lenders like Sallie Mae.
I’ve heard a few repeated retorts to these points from readers. Some argue that 10 years is too long for public servants to get their loans forgiven. But if you’re not planning on staying a teacher for a while, I’m not sure what incentive the government has to subsidize your education degree.
Others invoke the plight of the adjunct. Although workers at both public and private nonprofit universities are eligible for the public service program, they need to be employed 30 hours a week. Some schools are hesitant to give adjunct professors those hours, because it would mean paying for their health insurance under Obamacare. While that is a problem, I’m not sure it’s necessary to rearrange an entire federal loan program to minimize the damage of academia’s most heinous labor practices. One might argue that inexpensive loans would only exacerbate the problem by continuing to encourage a glut of Ph.D. students who can only find work as itinerant instructors.
It’s nearly impossible to imagine a functioning student-loan market open to all undergraduates without some kind of government intervention. For graduate students, it doesn’t need to play as large a role. Making loans on terms that earn a profit, but don’t risk losing the best borrowers to the private sector, seems like a decent compromise to me.