Obama to Grad Students: Pay Up

To save student-loan programs, the White House has saddled master's and Ph.D. candidates with added debt.

Speaking to a college crowd at the University of Michigan in January, President Barack Obama noted that for the first time Americans owe more on their student loans than on their credit cards. "That's inexcusable," Obama said. "Higher education is not a luxury—it's an economic imperative."

But even as the president laid out a program that included earlier loan forgiveness, lower interest rates, and caps on repayments of loans, he was putting the screws to graduate students. Starting this July, graduate-student loans will no longer be subsidized, meaning students will see their debts multiply with interest even before they've received their degrees.

The change will save the government an estimated $18 billion over the next decade—most of which has already been redirected to fund Pell Grants for undergraduates—but it's sure to tack thousands of dollars onto the debts of individual graduate students. The repercussions for graduate schools might be far-reaching, as people grapple with the question of whether a $50,000 master's or a $100,000 law degree is worth the money.

I paid off my law-school loans; you can, too!
Christopher Dilts
I paid off my law-school loans; you can, too!
Paster: Rising grad-loan rates “make a bad situation worse.”
Paster: Rising grad-loan rates “make a bad situation worse.”

"The burden on graduate students is growing, and this makes a bad situation worse," says Eli Paster, a Ph.D. candidate at the Massachusetts Institute of Technology and the head of legislative concerns at the National Association of Graduate-Professional Students. "We don't want a disincentive for people to pursue a graduate degree."

Borrow Now, Pay Later

Graduate students rely almost twice as much on loans as undergraduates, according to the College Board. In 2009–10, grad students financed 69 percent of their costs with federal loans. Nearly half of the average student's $15,888 in loans was federally subsidized, with the government paying interest while the student is in school and for six months after graduation.

Under the Stafford loan program, the largest of the government's school-financing plans, most full-time grad students have been able to borrow up to $20,500 a year at 6.8 percent interest, $8,500 of which would be subsidized. (Medical students can qualify for up to $40,500 in Stafford loans.) If students require more money, they can turn to Plus loans, which are unsubsidized and have an interest rate of 7.9 percent. Repayment of Stafford loans may be deferred for six months after graduation, though the unsubsidized portion accrues interest while the student is in school; repayment of a Plus loan begins after just 60 days.

With the federal government no longer subsidizing Stafford loans, graduate students will immediately start accumulating interest on all debts. A student who took out just the $8,500 a year in subsidized loans would have repaid $46,953 over the next 10 years, according to the National Association of Student Financial Aid Administrators. Unsubsidized loans would add an extra $6,385 in interest payments.

Of course, many graduate programs have much higher costs. The average master's student graduates with more than $50,000 in loan debt, says the Council of Graduate Schools, $77,000 for those with doctoral degrees. The Association of American Medical Colleges estimates the elimination of subsidies will increase the ultimate cost of loans for the average medical student by as much as $20,000.

Passing the Bucks

While acknowledging the student-loan crisis, Obama stopped the federal subsidy for graduate loans on the grounds that the government also owes too much money. Early reports blamed the move on the debt-ceiling debate, but the scheme was first contained in Obama's proposed budget for the new fiscal year.

"The idea had come up in the past, but it had never gotten much traction until it appeared in the president's budget proposal," says Patricia McAllister at the Council of Graduate Schools. "There was a search for savings, and once this was on the table, it was hard to push it off."

The death of subsidized loans was sold to student advocates as a necessary sacrifice to save the Pell Grant Program, which provides 9 million undergraduates with grants of up to $5,500 a year. "Congress now views all spending as bad, and we wanted to make sure the Pell Grant didn't get cut," recalls Rich Williams at the U.S. Public Interest Research Group's Higher Education Project. "Unfortunately, the money had to come from other programs in the higher-education pot."

That's small consolation to graduate students, who warn undergraduates to watch their backs. Already, interest rates on undergraduate subsidized loans will be doubling to 6.8 percent this summer, and the elimination of all subsidized loans might not be far behind, Paster says. "Graduate students went first, but undergraduates will be next."

"At least the money saved from eliminating subsidized loans went into a student-aid program rather than deficit reduction. That was a real possibility," says Megan McClean at the National Association of Student Financial Aid Administrators. She's troubled that a lot of recent changes to financial aid have come as part of budget negotiations, instead of being deliberated by legislative committees, which first conduct research and hold hearings with experts. "That creates better policies," she says.

This might also explain why many graduate students were caught by surprise at the elimination of their subsidized loans. "When financial-aid changes happen in the budget, it's not really announced," Paster says. "You find out about it when you apply for loans before the start of the next semester. At that point, you don't really have a choice, except not going to school."

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