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Blog Post

Graduate Student Lending in Desperate Need of Reform

American Enterprise Institute

December 8, 2023

Since 2005, graduate students in the United States have been able to borrow from the federal student loan programs essentially without limit. Before that, loans were available to graduate students from the US Department of Education, but they were constrained to reasonable levels.

Since limitless credit became available to graduate students in 2005, graduate student debt has soared: The median debt for a graduate student who completed their degree has increased from $22,400 in 1995-96 to $70,300 in 2019-20. And recent research confirms that this has driven rapid inflation in graduate school tuition. Eventually, a disproportionate share of the cost of this borrowing will fall back on taxpayers who are now on the hook to cover an ever-increasing share of these debts through the Biden administration’s recent expansion of student loan repayment programs. 

While lawmakers and the media are focused on student debt, broadly, I would encourage a heightened focus on the issue of graduate student debt. First, graduate student debt now makes up more than half of the outstanding student debt in the economy, and problematic six-figure individual student loan balances are almost always generated through borrowing to pay for graduate school. Second, the value proposition for federal intervention in graduate student lending is more dubious than for undergraduate lending.

Concerned about these trends, I’ve made a commitment to work toward identifying implementable solutions to this problem. And in the current political environment, that means reaching across the aisle to identify reforms that will be palatable to a range of political ideologies. So for the last several months, I’ve been working to do just that; partnering with Education Council and the Century Foundation, progressive think tanks, to identify a framework for a bipartisan solution. Our work together resulted in a new paper we jointly published today.

Our paper lays out five major recommendations for policymakers.

First, we should set reasonable, and perhaps aggressive, limits on borrowing. We can establish loan limits for federal graduate lending programs, capping how much students can borrow from the Treasury for their graduate education.

Secondly, we should get education subsidies out of the loan program and spend money in ways that reflect our national values. For example, the current policy regime funds certain professions that are of high social value and low individual economic return by having students borrow huge sums to pay inflated tuition and then ultimately forgiving debt in a convoluted system of subsidies hidden within the repayment system. Capping the amount that graduate students can borrow will free up a massive amount of dollars that can be spent giving direct subsidies in the areas of highest need.

Additionally, we need to ensure that graduate programs are delivering sufficient value for students and taxpayers. As I’ve written before, loans should be available for programs that have a documented good return on investment, and not those which produce little economic value for students who pursue them.

Furthermore, we must enhance the regulatory structure and consumer protections for private lending. With a drawback in federal graduate education financing will come new financial innovations among private lenders. While we should embrace such innovations, we must also ensure that there are protections in place for consumers.

Lastly, we ought to improve data disclosure and transparency. Policy must ensure that data are reported on a student-level basis so that programs can be more accurately evaluated for their value. This will enable better accountability through government oversight and also by enabling consumers to make better decisions for themselves.

Our system of graduate student lending, which was first created with too little consideration, is failing students and taxpayers alike. The failures of our current system have become so apparent that higher education thinkers from across the spectrum (who disagree on most everything) have come together to say: It’s time to reform graduate student lending.