“Federal programs allow grad students to borrow essentially unlimited amounts—whatever their schools charge—while requiring only a scant credit check and no assessment of their ability to repay…
…As graduate-school enrollment swelled over the past decade, the number of Americans owing at least $100,000 in student debt more than quintupled to 1.82 million as of Jan. 1, New York Federal Reserve data show. The number of all student borrowers nearly doubled to 43.34 million…..The promise of forgiveness is “the only reason I would have ever considered” amassing so much debt to attend Tulane University Law School, says Ms. Murphy, 45 years old. She earns $56,500 a year as an assistant public defender in West Palm Beach. “What we’re doing is randomly subsidizing lots of people without careful thought,” says Sandy Baum of the Urban Institute think tank, who has advised Hillary Clinton’s campaign. “That’s just really problematic.””, Josh Mitchell, “Grad-School Loan Binge Fans Debt Worries”, The Wall Street Journal, August 19, 2015
Grad-School Loan Binge Fans Debt Worries
Graduate students account for 40% of borrowing; many seek federal forgiveness
Virginia Murphy, an assistant public defender in West Palm Beach, Fla., has $256,000 in student debt. Photo: Scott Wiseman for The Wall Street Journal
By Josh Mitchell
Virginia Murphy borrowed a small fortune to attend law school and pursue her dream of becoming a public defender. Now the Florida resident is among an expanding breed of American borrower: those who owe at least $100,000 in student debt but have no expectation of paying it back.
Ms. Murphy pays just $330 a month—less than the interest on her $256,000 balance—under a federal income-based repayment program that has become one of the nation’s fastest-growing entitlements. She plans to use another federal program to have her balance forgiven in about seven years, a sum set to swell by then to $300,000.
The promise of forgiveness is “the only reason I would have ever considered” amassing so much debt to attend Tulane University Law School, says Ms. Murphy, 45 years old. She earns $56,500 a year as an assistant public defender in West Palm Beach.
The doubling of student debt since the recession, to $1.19 trillion, has stoked a national discussion over how to rein in college costs and debt and is becoming a major issue in the 2016 presidential race. Little noted in the outcry is the disproportionate role played by postgraduate borrowers, who now account for roughly 40% of all student debt but represent just 14% of students in higher education.
Propelling the surge in grad-school debt is a welter of federal programs that make it easy for students to borrow large amounts, then to have substantial chunks of those debts eventually forgiven. Critics of the system say it makes it easier for graduate schools to raise tuition, and for some high-earning graduates such as doctors to escape debts they can afford to repay.
“What we’re doing is randomly subsidizing lots of people without careful thought,” says Sandy Baum of the Urban Institute think tank, who has advised Hillary Clinton’s campaign. “That’s just really problematic.”
Federal programs allow grad students to borrow essentially unlimited amounts—whatever their schools charge—while requiring only a scant credit check and no assessment of their ability to repay. Other government loan programs, such as those for undergraduate students and home buyers, set loan limits to prevent borrowers from getting too deep into debt. Undergraduates are capped at $57,500 total in federal loans.
As graduate-school enrollment swelled over the past decade, the number of Americans owing at least $100,000 in student debt more than quintupled to 1.82 million as of Jan. 1, New York Federal Reserve data show. The number of all student borrowers nearly doubled to 43.34 million.
As payments come due, droves of graduate borrowers are seeking relief under income-based repayment plans. Enrollment in the plans, which lower borrowers’ bills at taxpayer cost, has more than doubled in the past two years to 3.8 million Americans. About half of all debt from one of the main loan programs for graduate students, called Grad PLUS, is now covered under the plans.
The Obama administration defends the loose credit policy, pointing out that grad students generally are good credit risks because they typically become society’s wealthiest earners, and that income-based repayment is designed as a safety net during tough times.
“The Obama administration is committed to keeping a higher education within reach for all Americans,” says Denise Horn, a Department of Education spokeswoman.
The federal student-loan programs are designed to generate revenue for taxpayers, and they do. But surging enrollment in the debt-forgiveness programs recently prompted the government to increase by $22 billion its estimate of the long-term costs of the provisions. And a recent move to expand the most generous repayment program to millions more borrowers will cost an estimated $15.3 billion.
Critics say offering unlimited loans to students, with the prospect of forgiveness, creates a moral hazard by allowing borrowers to amass debts they have little hope or intention of repaying, all while enriching institutions and leaving taxpayers to pick up the tab.
Sen. Lamar Alexander (R., Tenn.), chairman of the committee overseeing education, has proposed reinstating loan limits for grad students as part of an overhaul of education policy that could face votes later this year.
The typical college student who borrowed owed about $27,000 upon graduation in 2012, according to an analysis of federal data from the New America Foundation, a centrist think tank. Those earning a master’s typically owed between $50,000 and $60,000; law degrees, $141,000; and medical degrees, $162,000.
Very few undergraduates owe six figures. In 2012, the most recent year for data, just 0.3% of undergrads owed six-figure debts, according to research by Mark Kantrowitz, publisher of information website Edvisors.com. But among graduate and professional-school students, 15% owed at least $100,000 upon graduation—more than double the share just four years earlier.
Many borrowers describe a system that allowed them to engage in a spiral of borrowing, often piling one loan on top of another while struggling to keep abreast of interest payments.
Bonnie Kurowski-Alicea, 40 years old, owes almost $209,000 in student debt after earning a doctorate in industrial organizational psychology at Capella University, a for-profit school.
After borrowing to earn her bachelor’s, Ms. Kurowski-Alicea says, her main motivation for earning a master’s and then a doctorate was to postpone repaying her student loans, which she said were too high for her minimum-wage income at the time. The government doesn’t require payments while students are in school.
“There’s no way to pay it afterward. It’s a continuous cycle,” says Ms. Kurowski-Alicea, of Clermont, Fla.
She filed for bankruptcy in 2008, the year she earned her last degree. She said the filing came after a car crash prevented her from working for six months. Federal student loans cannot be discharged in bankruptcy.
Ms. Kurowski-Alicea has repeatedly been allowed by the government to postpone repaying her loans, but the balance has grown due to interest. She now earns $80,000 as a self-employed contractor in corporate training, but her debt has grown so high she says she doesn’t think she’ll ever be able to pay it off.
She pays $1,060 a month but plans to take advantage of the administration’s latest proposal to allow borrowers with older loans to set payments at 10% of discretionary income.
“I’ll be the retiree that’s getting Social Security garnished” because of student loans, says Ms. Kurowski-Alicea, whose husband is unemployed and owes $75,000 in student debt.
Before 2006, grad students generally could borrow up to $138,500 total—including any undergraduate debt—from the government’s main loan program, Stafford loans. If they needed more, they would have to go to private lenders.
In 2005, Congress lifted the limit by creating Grad PLUS loans, which cover any expenses after graduate students hit the Stafford ceiling. The measure helped students bypass private lenders, which student advocates said charged high interest rates and did too little to protect borrowers who fell on hard times.
The program also helped lawmakers in their quest to cut the federal deficit, because the government charges grad students higher interest rates than undergraduates. Grad PLUS was included in a deficit-reduction package passed by the Republican-controlled Congress in 2005 and signed by President George W. Bush in 2006.
“With budget constraints and concerns about spending, we have created an environment where the federal government is making money off of the graduate lending” to subsidize college students, says Elizabeth Baylor, head of postsecondary education at the left-leaning Center for American Progress.
But after creating the Grad PLUS program, lawmakers passed additional measures that have begun cutting into the revenue stream from the grad loans.
A 2007 measure created a debt-forgiveness program to encourage grad students to become teachers, public defenders and other public-service positions that don’t pay well but are deemed to benefit society. Under the program, borrowers working full time for a government agency or nonprofit employer can have their remaining debts forgiven if they make 120 monthly payments—10 years worth—on time.
Under a separate law, private-sector workers can generally have balances forgiven after 20 years.
Many borrowers are planning to combine debt-forgiveness programs with income-based repayment plans, the most generous of which was championed by President Barack Obama and passed by Congress in 2012. That plan, known as Pay As You Earn, caps borrowers’ monthly payments at 10% of their discretionary income—defined as any adjusted gross income in excess of one-and-a-half times the poverty line.
Mr. Obama pitched the plan as a way to stem defaults and help cash-strapped Americans who couldn’t afford to make payments on a standard repayment scheme. A 1993 program was seldom used, largely because the terms—capping payments at 15% of discretionary income—weren’t generous enough to significantly lower borrowers’ payments.
The collection of incentives—passed in separate measures over several years—weren’t intended to work together to help so many grad borrowers. The Obama administration is taking steps that it says will better target borrowers who need help the most, such as new rules to extend the repayment period from 20 to 25 years for grad borrowers on income-based repayment.
The effects of loosened credit are most evident among graduates of medical and law schools, the biggest users of Grad PLUS, whose debt burdens have skyrocketed in the past decade. As of 2012, more than half of all law-school borrowers and 30% of medical-school students use Grad PLUS, according to the Department of Education.
Emily Van Kirk and her husband owe a combined $692,000 in federal student debt from their time at American University of the Caribbean School of Medicine, in St. Maarten.
A big chunk of their debt covered living expenses such as rent and food, amounts set by the school. She now wishes she would have been more disciplined and borrowed less. “No one gives you guidance about this,” says Ms. Van Kirk, 30 years old. “Everyone assumes, ‘Oh, you should take out the maximum amount of money that they’re going to give you.’ ”
Ms. Van Kirk, who specialized in internal medicine, just finished her residency and is about to start a permanent position at the hospital making roughly $200,000 a year. Her husband is serving as chief resident and next year will seek to become a doctor in critical-care medicine, a position that would likely pay well into the six figures
Each has been paying about $400 a month under income-based repayment, instead of the more than $3,000 they would each be paying under a standard repayment plan. “I would be living in a box and eating salt crackers” without income-based repayment, Ms. Van Kirk says. “It just wouldn’t be financially possible.”
She says she and her husband plan to pay down their debt as much as possible now that she is earning more. But they also are planning to search for jobs at a nonprofit hospital so that they can have their student-loan balance forgiven in 10 years under the program designed to steer borrowers into public-service jobs. Their current employer is owned by a corporation.
The typical medical-school graduate owed $161,772 in student debt at graduation in 2012, according to the New America Foundation. That figure rose an inflation-adjusted 31% over eight years.
Debt growth was even sharper among law-school graduates. The typical student who borrowed left law school owing $140,616 in 2012, up 59% from eight years earlier.
Debt forgiveness was intended to ease the debt burdens of workers such as Ms. Murphy, the Florida public defender, to encourage them to stay in the public sector rather than leaving for higher-paying private-sector jobs.
But a number of recent studies show the benefits are largely going to people who need them the least—doctors and many lawyers who will end up making six-figure salaries. The benefits are less meaningful for undergraduate borrowers, because their average debt burden is roughly $30,000 and income-based repayment plans aren’t likely to lower their bills by much.
Of the 5,686 hospitals in the U.S., 73% are nonprofits or government owned, according to the American Hospital Association, thus qualifying their employees to have loan balances forgiven after 10 years.
Josh Lantz, a financial adviser whose clients are mainly doctors, says student debt is “one of the biggest things on a mind of a younger physician.”
The quest to get rid of that debt as swiftly as possible through federal loan forgiveness, Mr. Lantz says, “is one of the major factors in which they make their decision” on where to work.