Driven by increases in graduate enrollment and the availability of uncapped loans, graduate debt has become a growing share of federal student lending. Most of the growth in the average and overall levels of student indebtedness in the past fifteen years has been driven by graduate student debt. Despite being just 21 percent of all enrolled higher education students during the 2021–22 academic year, graduate and professional students accounted for 47 percent of the federal student loans disbursed. Outstanding Direct PLUS loans for graduate and professional students (hereinafter “Grad PLUS loans”) have nearly tripled in the last seven years (from $37 billion to $90 billion). Median Grad PLUS loan balances are nearly triple what they were just ten years ago (increasing from $21,800 to $57,800). This increase in graduate borrowing coincides with the proliferation of new graduate programs, raising questions about whether these programs are worth the federal aid dollars they’re receiving, and if they are being created to chase those federal dollars.
A key distinguishing feature of federal graduate and professional lending is that, unlike other federal student loans, there are currently no statutory or regulatory limits for Grad PLUS loans. The only limit is that these loans cannot exceed a student’s “cost of attendance,” which includes both direct costs of enrollment, such as tuition, and living expenses, such as housing, food, transportation, and childcare. This cost of attendance figure is left up to the enrolling institution alone to determine. In addition to a lack of loan limits, Grad PLUS loans also have effectively no repercussions for programs that consistently result in low earnings and unpaid debt. Until very recently, graduate student loans generated revenue for the government. But a combination of factors—increasing prices, expansion of repayment options with shorter payment duration before forgiveness, and an expansion of graduate programs that do not provide sufficient earnings to fully repay this increasing debt—means that graduate loans now cost the government money, rather than generating revenue. Since it is politically more feasible to cut federal programs that cost money as opposed to those that generate revenue, this change in revenue status could open an important policy window to redesign the federal approach to financing graduate education.
The combination of effectively unlimited federal student lending, no federal grant funding, and no outcomes expectations for eligible programs has created a system with both costs and benefits. Ideally, federal aid for graduate students would facilitate the investment in worthwhile educational experiences that are either individually enriching, socially valuable, or both. But because of a lack of sensible borrowing limits, grant aid for students pursuing socially valuable credentials with lower earnings returns, or any evaluation of economic value in federal graduate financing policy, there are also significant downsides to the current system
Driven by net prices that have grown faster at graduate programs than for undergraduate degrees, the average graduate student with loans now borrows $70,000, and 21 percent of students who take out loans borrow more than $100,000. At 15 percent of graduate programs, the median graduate is earning less than an average undergraduate degree holder that never attended graduate school ($50,000). And 39 percent of nonprofit and 44 percent of for-profit professional programs such as law and medicine leave their graduates with debt that exceeds one fifth of their discretionary income—the level research shows is unaffordable. Federal policy is not currently designed to maximize positive outcomes or minimize harms to borrowers.
Misaligned federal policy design and increasing graduate debt do not impact all students equally. The average Black graduate student holds $10,000 more in debt than the average white student, and the average Latino student holds $6,000 more in debt than their white counterpart. This is in part due to Black and Latino students seeking postgraduate credentials to gain income parity with their white bachelor’s degree-holding counterparts: white bachelor’s degree recipients earn nearly $2,000 per year more than Black master’s degree recipients: $88,640 per year compared to $86,920.
Given all these considerations, it is past time to explore the impact of graduate student debt and whether federal policy mechanisms are working effectively for students and taxpayers. The American Enterprise Institute, EducationCounsel, and The Century Foundation undertook a joint process to examine—across ideological lines—the nature of the existing system that finances graduate education, including its benefits and downsides, and to design a framework that should guide the improvement of federal policy regarding graduate student financing. This report aims to outline policy options that address the burden on students, particularly the disproportionate burden facing students of color, and the growing cost of the graduate loan programs for taxpayers.
The shared goal of this process was improved outcomes for students and better value for taxpayers. Analysis and discussion of different policy options led to the conclusion that any politically viable and effective approach must address five different dimensions of the problem through the following set of policy levers.
1. Set reasonable loan limits
Under current law, the only constraint on federal graduate lending is the cost of attendance (the combination of program price and living expenses) set by the institution. As a result, in practice, there are no annual or lifetime limits or ability-to-repay considerations for graduate student lending, and no per student, program-level, or institutional-level limits on aggregate debt disbursed or tuition that can be covered by federal student loans. This allows institutions to charge, and students to borrow, effectively unlimited amounts, regardless of whether these amounts are commensurate with what it costs the college to deliver a program, the value of the degree granted, or what graduate borrowers can afford to repay. Some reasonable annual and aggregate limit for graduate borrowing is needed to mitigate the risk of student borrowers facing unaffordable debt and to limit the incentives for institutions to increase prices in ways that fail to yield a return on investment to taxpayers.
2. Award grant aid to students and institutions to address equity and social good considerations
A potential consequence of loan limits is constraining access to graduate programs that enable students to increase their earnings and employment prospects. To the extent that these limits will prevent students from taking on debt that would have been unaffordable to repay, this is an unmitigated good. However, such limits may unintentionally prevent students from attending programs that could leave them better off, particularly low-income students and students of color who may lack alternative options to access graduate education financing. For institutions with fewer resources, like HBCUs and other MSIs, that maintain high-quality programs, loan limits may also restrict these institutions’ ability to serve students, since a lack of resources makes them more reliant on a debt-financed graduate program model. And for degrees across institutions that are socially valuable but where the economic return is insufficient, value metrics might not sufficiently account for the social good provided by these programs. A more economically and administratively efficient approach than debt financing would be to subsidize those students and programs with grant aid and direct institutional funding, since grant funding is more direct, transparent, targeted, and unburdened by administrative costs of subsequent forgiveness. Constraining loan eligibility would likely save the federal government money that could be spent on grant aid. This offsetting change in policy would more efficiently address economic disparities and support institutions that offer social value that less frequently translates to individual economic return.
3. Ensure sufficient value and return on investment for students and taxpayers
Student loans should only be available for programs where students are generally getting a good return on their investment and there isn’t a consistent pattern of taxpayers being on the hook to cover unpaid balances. Students deserve to know that the debt they are taking on for their education will be affordable to repay. And taxpayers deserve to know that federal dollars are spent in ways that are delivering benefits to society and that there will be a reasonable expectation that loan dollars will generally be repaid. To achieve that, the federal student loan system should not subsidize and effect endorse programs that consistently leave students with earnings insufficient to reasonably repay their loans. Consequently, any comprehensive system of federal graduate education policy must address the problem of institutions and programs charging prices and originating debts for degrees that aren’t worth the cost.
4. Enhance the regulatory structure and consumer protections for private lending
In response to federal borrowing restrictions, more loans and new products could emerge from private student loan providers, necessitating an updated regulatory regime to ensure sufficient protections for consumers. For example, private student loans are not currently dischargeable in bankruptcy. If private loan volume were to become a larger part of financing graduate and professional school, that risk to borrowers may be untenable, particularly for low-income borrowers. Without sufficient guardrails in the private lending market, borrowers at high-cost programs could be driven to take out unaffordable loans. At the same time, clarity on requirements for private financing could improve market certainty so that private lenders could provide additional liquidity to borrowers and programs when needed.
5. Improve data disclosure and transparency
Though recent updates to federal data systems like IPEDS and College Scorecard have improved the public’s ability to access additional information on fields of study, earnings, and student debt, there is still a significant lack of basic information for students about comparable program costs and outcomes, and a lack of information for institutions, accreditors, researchers, and policymakers to drive understanding about program outcomes and inform policies related to graduate programs. Policy must, at a minimum, ensure data are reported on a student-level basis to calculate how programs are providing value to students and taxpayers, to ensure students are fully informed of their options before enrollment, and to equip providers with sufficient data to determine which programs are not best serving students.
Making policy changes through just one of these levers is unlikely to provide an effective solution to the challenges facing graduate student aid policy. Instead, a multipronged approach is needed, to address multiple shortcomings of the policy status quo simultaneously. For example, imposing new limits on borrowing for graduate students (lever 1) will mean that some students will no longer be able to afford to enroll. While in some instances, those changes in enrollment patterns may be desirable (for instance, enrollment declines at low-quality programs), it may also be a blow to equal opportunity, given the racial and socioeconomic distribution of those effects. Grant aid could be used (lever 2) to offset some of these undesirable consequences without harming individual borrowers. If federal aid is made available to graduate students to enroll in programs without regard for the value those programs provide to students and taxpayers (lever 3), students can often be left worse off financially and at significant cost to taxpayers. Without reconsidering the regulation of private financial instruments (lever 4), some students could end up facing worse outcomes than the status quo. And without robust and transparent data about how these policies are impacting borrowers and graduate programs (lever 5), institutions, students, and policymakers will not be able to make needed adjustments in response to market signals or make informed choices about which programs will leave them better or worse off. Each of these levers could vary in its specifics and design, but the key to this framework is a holistic approach that draws from each lever in a balanced manner to create an effective and politically viable policy approach.