Graduate Student Debt Is Subsidizing an Ever-More Broken Higher Education System

Student debt have been soaring in the past few decades, the result of synergism between rapidly increasing tuition costs and the stagnation of household incomes. The increasing levels of debt is rapidly becoming a crisis, with negative downstream impacts on purchasing power and the economy.

Although the burden of student loan debt is borne by many students, not all college debt is created equal. The real problem is the cost of graduate school. Whereas undergraduate students are able to borrow up to $5,550 per year in federal loans, graduate students can borrow up to the full cost of attendance. That easy money leads to a disastrous cycle in which colleges are incentivized to raise tuition to eat up available dollars, and students are forced into ever-deeper debt in order to continue their education.

A 2014 study by the Brookings Institute found that “roughly one-quarter of the increase in student debt since 1989 can be directly attributed to Americans obtaining more education, especially graduate degrees. The average levels of borrowers with a graduate degree more than quadrupled, from just under $10,000 to more than $40,000. By comparison, the debt loads of those with only a bachelor’s degree increased by a smaller margin, from $6,000 to $16,000.

Moreover, according to data recently released by the Federal Reserve Bank of New York, the number of borrowers with balances over $100,000 has more than quadrupled in the last 10 years. Similarly, the default rate among this group of borrowers has spoked, going from 6 percent between those who graduated in 2005-06 to 20 percent for those who left school between 2010-11.

What is fueling this escalating debt challenge? PBS’s Jon Marcus has the answer:

Cash-strapped private universities and colleges are relying on the money they take in from their graduate programs to stabilize increasingly wobbly budgets. Public institutions are using revenue from graduate offerings to make up for state cuts and undergraduate tuition freezes ordered by governors and legislatures.

It’s an effective solution to a big problem faced by institutions often accused of being financially unimaginative; the president who put it into place at Simmons is a former bank executive who inherited a school that could barely meet its payroll and has transformed it into one that now has tens of millions of dollars in annual surpluses.

But it also means that higher education’s money problems are quietly being balanced on the backs of graduate students who face escalating debt.

Colleges are increasingly expensive to operate. Not because education is fundamentally costly to deliver—all it takes is a room, some chairs and a professor—but because the size of college administrations have grown enormously over time. And those administrators, both in an act of self-perpetuation and a desperate attempt to recruit more students, have invested gobs of money in campus bells-and-whistles. Most graduate schools, by comparison, are relatively cheap to operate. But rather than pass that onto the students in the form of modest tuition, they’re increasingly jacking up prices to pay for all of their other spending habits.

And as Megan McArdle writes for Bloomberg View, they are being unwittingly aided and abetted by the federal government:

It’s bad enough that schools do this; it’s worse still that the American taxpayer is helping them. For it is hard not to suspect that the proliferation of master’s degrees programs has less to do with exploding employer demand for advanced degrees in Jewish studies or public history, and more to do with the availability of student loans to fund those degrees. The government caps the amount that undergraduates can borrow, but offers graduate students considerably more rope with which to hang themselves.

Ding. Ding. Ding. Colleges have created an unsustainable financial situation, built upon things only tangentially related to providing a higher education, have largely tapped out the opportunity for higher undergraduate tuition, and are now going where the money is – un-capped federal graduate loans.

How disappointing colleges are so focused on shoring up their up finances that they would set about to ruin those of young adults. The federal government should pursue steps to make sure those interests are once again aligned.