By Graham Andrews
A new report by researchers at the Philadelphia Federal Reserve finds that new student loan limits imposed by Congress will lead to approximately one in eight graduate students struggling to secure sufficient educational loans from the private sector beginning in the upcoming academic year.
Background
When the H.R. 1 reconciliation bill became law last July, it included significant changes to federal student loans for graduate education. The law changed federal financing options for graduate students in two ways: it eliminated Graduate PLUS loans and modified Direct Loan limits for graduate programs.
Beginning in July, graduate students will face both annual and cumulative limits on how much they can borrow from the federal government. Students who need additional financing to cover the costs of their education may need to turn to the private sector to help meet the full expenses of their graduate education, including tuition, books, and other costs of attendance such as food and housing.
The new research from the Consumer Finance Institute at the Philadelphia Federal Reserve Bank and American University utilizes a novel data set to project the number of graduate students who may be subject to these limits. The report also analyzes borrowers’ creditworthiness to estimate the share of borrowers who may find it difficult to obtain private student loans.
Borrowing Patterns and Creditworthiness
The Consumer Finance Institute found that, of the 66,000 graduate students in its data set, most did not take out any student loans. The notable exception was students in professional degree programs, where more than two-thirds borrowed some amount in student loans. Thus, as the chart below shows, the students who will be the most affected by annual loan limits included in H.R. 1 are disproportionately those in doctoral or professional degree programs.
About 12.5% of all graduate students, or 28% of borrowers, took out loans in amounts over the new annual loan limits in H.R. 1. This group of high-balance borrowers would likely need to find alternative funding sources for an average of $21,700 per year that would no longer be available through the federally financed loan programs.
The study also found that about 38% of graduate students had no credit history or a low credit score before starting their graduate studies. These students may struggle to qualify for private student loans without a cosigner.
Why It Matters
Americans with graduate or professional degrees (for example, degrees in medicine, law, advanced STEM, etc.) often earn a substantial wage premium, but the initial cost of such programs can be a barrier to students who do not have good credit scores or access to a co-signer on a loan application. Federal student loan programs have historically helped such students access these degrees and opened pathways to the high-paying careers that result from them. Compounding concerns about access to graduate education, these loan limits may also worsen labor shortages in healthcare or other critical areas.
The Consumer Finance Institute’s analysis shows that large majorities of graduate students either do not take out student loans or do not borrow above the new annual loan limits. However, the changes passed in H.R. 1 will make it more expensive and more difficult for some students to access graduate-level education.
Graham Andrews is research analyst at AAU.