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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.
"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."
Some worry the higher costs could make graduate school solely a province for rich kids: On average, black and Hispanic students already have higher debt loads than whites and Asians.
McAllister says the government must make sure that debt doesn't dissuade students from going to graduate school. The Bureau of Labor Statistics projects that in the next decade, 2.6 million jobs will require people with advanced degrees. "If we want to meet these workforce needs, we should be investing in graduate education," she says, "not balancing the federal budget on the backs of students."
The $80,000 MFA
Student debt might already be affecting some graduate programs, as nationwide enrollment dropped slightly in 2010, the first decline in seven years, according to a recent report by the Council of Graduate Schools. But it's a mixed bag: While fewer students are seeking doctorates in the arts and humanities, more have enrolled in business schools and the sciences.
That trend is mirrored at area universities. The number of graduate students at CUNY has remained virtually unchanged at about 33,000 since the fall of 2009, yet its Graduate Center has seen gains in the health sciences. Likewise, Columbia's professional schools have grown in the past year, while enrollment has been flat in its Graduate School of Arts and Sciences. NYU reports similar findings, though new applications are up a bit this year.
MFA graduate student Monica Johnson found unwanted fame for showing up in Zuccotti Park last November to talk about the $88,000 in debt she accumulated during college and graduate school. She understands those who criticize her for a costly degree choice.
"At this point, I'd never say an MFA is the best degree, but there was a logical line of reasoning that led me here," Johnson says. "Both of my parents have associate degrees from a technical art school in Michigan, and both of them were able to have viable careers." She points out that not even law school is a safe bet these days. The job market is having a hard time absorbing new law graduates, and as a result, the number of students taking the LSAT has dropped by 25 percent over the past two years.
"I wasn't comfortable taking out the loans, and I kept asking people, 'Is this what you're supposed to do?' I'm not blaming anyone, but now I wish someone would have pulled me back. Everybody said, 'You just got to do it.'"
Johnson says her big mistake was starting her master's at Pratt Institute, where she borrowed more than $40,000 to cover one year's tuition, before leaving to enroll in an integrated-media art program at Hunter College. "I have a job, and I'm paying only $1,000 a class," she says. "It really is the price tag that's the problem, I think."
Facing the Future
The students gathered in front of St. Francis College in Brooklyn don't look like the next class of suckers, but everyone interviewed during a recent lunch hour was thinking about graduate school. Most claimed a graduate degree is now necessary to get a good job.
"Going to grad school gives you an advantage, but so many people go," says Christopher Santoro, a junior from Dyker Heights. "Grad school's become what college was 30 years ago."
Santoro has paid for his education with Stafford loans. Tuition at St. Francis is $18,100 a year, and 95 percent of students receive financial aid. "It's going to take a while to pay off all the loans," Santoro says. "Especially if I go to law school, it will be a lot, lot more. But I have to do it. I'm even contemplating going to grad school in engineering because law-school graduates are having a hard time getting jobs. My mother is the head of human resources at a bank, and she says everybody they hire is coming out of an Ivy League school.
"It's good that Obama's talking about financial aid," Santoro says, and he doesn't blame the president for taking the subsidy away from federal loans for graduate students. The student-debt crisis is another inherited mess, he says. "I'm a libertarian, but if I had to vote right now, I'd vote for Obama. I don't like anyone on the Republican side. We have no choice."