Once effective next summer, at least one-quarter of students may need private loans once a new cap for federal loans takes effect, which tends to bring higher interest rates to cover their education, multiple studies show. For some people, loans can become so expensive that they cannot get a master’s degree or doctorate.
Currently, the group can borrow federal loans to the total cost, thanks to a program called Grad Plus. But starting July 1, students will be the highest price per year at $20,500 or $50,000, depending on whether they take graduate or professional courses respectively. Those who work in graduate programs can only spend $100,000, while students in professional programs will be limited to $200,000. Congress has made changes, part of a large beauty bill that passed earlier this summer.
According to a new analysis by the U.S. university’s Center for Higher Education and Economics Research, the cap means that four borrowers in the nine largest major programs may need to find additional financing to pay for tuition. The 75th percentile borrower exceeded six of nine areas.
Peer notes that this is not only the most expensive PhD program in medicine and dentistry, students will face challenges. Of the 30 top-loan master’s degree programs, 50% of students exceeded the cap by nearly half.
Peer and other policy experts from the research team say many of these students may have a hard time finding a private lender to make up for the difference and may force them to quit or not participate. Even if students find out that a lender, taking out a private loan can lead to steep, sometimes predatory rates that require decades of returns. (Study shows that low-income individuals work particularly hard to secure private financing due to factors such as low credit scores, underassetment, or inconsistent income.)
Prior to this new law, “students could have filled out their FAFSA, applied for a loan through the Department of Education, and were able to borrow the full attendance fees of their program.”
But now, for a quarter of graduate students, it may not be that simple.
“I think it will surprise a lot of people,” he said.
Can private lenders fill in the gap?
Other researchers at Urban Institute and future work have also cut the figures on loan caps and reached similar findings.
Future jobs estimated in a report released last month estimates that if the loan cap is already available for the 2019-20 graduation class, about 38% of graduate borrowers will need to charge more loans beyond the CAP. The report said federal loan issuance will be reduced by $9.7 billion due to restrictions, a decrease of about 28%.
Urban also used data for the 2019-20 years, but violated the data as planned and found that the share of dentistry students was the largest, exceeding the upper limit. About 56% of people will exceed the annual limit, while 58% blow through the total limit. Other programs with a high share of students that can be pushed into the private market include medicine, accounting for 29% of the Masters and Masters of Fine Arts, accounting for 26%.
Policy experts on both sides of the political aisle tend to agree that the student debt crisis needs to be resolved. But with conservative lawmakers and analysts believe that in order to reduce student debt and encourage colleges to reduce costs is necessary, some researchers worry that the limits are too aggressive and ignore nuances such as the program’s ROI.
“The pain involved here is a little more than the pain required to contain the worst abuses in the system,” Matsudaira said. “Overall, a better approach is to take a method where different areas of research have different limitations, while borrowers’ repayment capabilities are scaled.”
Some questions about how loan limits will work and what programs they will apply will be answered later this month by the Education Department starting legal provisions through the rulemaking process. Representatives in nursing, aviation and social work have begun to speak out why their programs should be considered professional degrees and therefore qualify for a higher cap.
“In today’s economy, most graduate education is practical and aligned with the workforce, providing students with preparation for healthcare, education, consulting, technology and more,” Stephanie Giesecke, a representative of the National Association of Independent Colleges and Universities, said in an August public hearing. “The definition of risk is too narrow for programs that are critical to communities and employers across the country.”
Just like Matsudaira, JFF senior director of policy Ethan Pollack said that while he sympathized with the Republicans’ diagnosis debt too high, he might solve the problem in a different way. However, instead of suggesting changes to the CAP itself, the JFF report examines the financial implications for borrowers and proposes ways in which institutions, governments and private lenders can adjust the response.
A key suggestion is to use results-based financing for private loans, which will be based in part on the income of the borrower after graduation. This approach can help students or auxiliary personnel who lack a good credit history still pursue good degrees, such as a JD.com, Pollack said.
But current regulations, such as requiring banks to provide a flat annual percentage, or when providing loans, APR makes it difficult for some private providers to explore new models such as results-based financing, he explained. Pollack added that if the government is to build on recent legislation by amending current regulations and introducing new guardrails for private lenders, the OBF model could make non-federal loans more affordable for borrowers of all backgrounds.
“In a sense, the federal government is stepping on both gasoline and brakes,” he said. “They say they want the private market to step up, but at the same time, the federal government is one of the obstacles to the private market, able to strengthen in the way we all want them to want them to be financing for more friendly student terms.”
Matsudaira, on the other hand, is even more suspicious.
“The biggest question is whether the private sector can actually come in and fill a big hole,” he said. “Even if they do, how long does it take for them to spin to do something like this?”
