“College costs are high. Students are burdened with debt…” McMahon told the House education committee in May. “We have to do something to lower the cost of college.”
With that goal in mind, Republicans used last year’s Big Good Bill to disrupt the program known as Grad PLUS and limit graduate loans. The assumption is: Borrowers will choose cheaper programs, and expensive schools will have to lower prices to compete.
But many economists aren’t sure it will do what Republicans say it will.
A decades old idea
The idea that there is a correlation between federal student loans and what colleges charge goes back nearly four decades, to Feb. 18, 1987.
That day then-Secretary of Education William Bennett, under President Ronald Reagan, wrote a scathing opinion The New York Timesentitled “Our Greedy Colleges.”
In it, Bennett praised the schools for tuition increases that outstripped inflation, and pointed out that increases in federal student aid “have enabled colleges and universities to increase their tuition, confident that Federal loan subsidies will help curb the increase.”
His idea caught on, and economists call it “The Bennett Hypothesis.”
“The Bennett Hypothesis basically says, if you provide more government aid to schools, they will respond by raising the price,” said Phillip Levine, a professor of economics at Wellesley College.
Nearly 40 years later, Republicans dusted off the Bennett Hypothesis to impose stricter limits on student borrowing.
Graduate school is fueling the exponential growth of student debt
For clarity, the current limits are open undergraduate the loan is static – and has not been static over the years. One reason: According to Levine, the price of bachelor’s degree programs — what families actually pay — has stabilized recently.
“We’ve seen at the undergraduate level for at least the last five years or so that the cost of college has actually been lower,” said Preston Cooper, who studies higher education policy at the conservative-leaning American Enterprise Institute (AEI).
But the cost of graduate the school has increased significantly.
“We’re at a point where almost half of the borrowers are currently among graduate students, despite being a very small percentage of the population,” said Robert Kelchen, a professor of higher education at the University of Tennessee, Knoxville.
Which brings us to Grad PLUS, which the Trump administration plans to close on July 1.
For two decades, Grad PLUS has served as a supplement to the regular loan program, allowing graduate students to borrow as efficiently as they need – no restrictions or guard lines.
Cooper says it’s hard to imagine that Grad PLUS has helped raise school costs.
“So far, it’s been a very simple answer [for schools] to increase the income a little every year by increasing the cost of schooling because they know that the federal government will have to give their students loans for those additional costs.”
What the research shows
“Having unsecured loans, I think, is not a good policy,” said Jeff Denning, an economist and professor at the University of Texas at Austin.
Denning was part of a team of researchers studying the Grad PLUS program – to test the Bennett Hypothesis. They wanted to know if, in Texas, the suddenly unlimited font of Grad PLUS loans that began in 2006 contributed to graduation programs increasing their rates.
Short answer: Yes.
The researchers wrote that, for every additional dollar in student loans, graduate schools increased their rates by $0.64 (after accounting for the grants they issued).
Republicans often cite Denning’s work as a reason to end Grad PLUS, arguing: If schools are increasing their tuition at nearly the same rate as state aid, why can’t that be true? Less help should lead to lower prices.
But it’s not that simple, says Kelchen of the University of Tennessee, who has also researched the impact of Grad PLUS, particularly at business, medical and law schools.
“I found no evidence” of a direct link between government aid and prices, Kelchen said.
Even when Denning is asked if the Bennett Hypothesis is true, he says “it depends. I think there’s evidence that this happens in certain situations, and there’s evidence that it doesn’t.”
The Bennett Hypothesis is “a logical conclusion,” according to Kelchen, “if you consider that these graduate programs are huge profit centers.” Some say. Others are not.
Medical school, for example, is “not very profitable” for schools, Kelchen said. “It can take millions of dollars to produce a medical degree. So limiting borrowing won’t reduce those costs.”
Overall, he adds, the evidence supporting the Bennett Hypothesis is “very mixed.”
Levine says the increase in the cost of higher education in recent years is due to something known as the “cost epidemic.” What is that?
In the long run, however, many businesses tend to be more efficient, Levine said, which helps them contain costs while increasing revenues. But higher education doesn’t work that way.
As wages rise in some fields, colleges need to keep pace to attract potential workers to other fields.
A half-dozen economists and higher education experts NPR spoke to agreed on one thing: Whatever the impact of pricing, the Grad PLUS program, as a policy, was flawed.
“I think there was a broad consensus that the idea of allowing graduate students to borrow money indefinitely was not a good idea,” said Sandy Baum, an executive at the Urban Institute, a nonpartisan think tank.
But, regarding the Bennett Hypothesis, Baum is skeptical: “There’s been a lot of research into what causes the rise in college prices and the effects of increases in student aid. And most of them find that in some cases … especially for-profit institutions, it’s true. But mostly it’s not true.”
Instead, Baum says, the rise in prices has been driven by many factors, from the “cost epidemic” and student loans, to the rising costs of insurance, technology – and even the cost of living.
Will the end of Grad PLUS force colleges to lower rates?
So what are we to make of the Republicans’ current argument, that cutting student loans for graduate students will lead to lower rates?
AEI’s Cooper agrees to end Grad PLUS, but doesn’t expect prices to drop anytime soon.
“I don’t want to promise that, in the first year, everybody’s going to cut their costs, and, you know, it’s going to be great,” Cooper said. “But I think this will create pressure [on prices] over time.”
Kelchen at the University of Tennessee is keeping his hopes low.
“I expect to see, at the very least, a small drop in tuition as students may be more price sensitive and shop around less,” Kelchen said.
Levine, at Wellesley, says dramatic price drops are unlikely: “Is it conceivable that it might effect some small change in graduate income? Maybe. … Colleges don’t just make their prices.
Even Denning, whose research found clear evidence of a link between federal loans and college prices, says of the new loan restrictions that could cause rates to drop: “It’s definitely possible. I’m not sure if it’s going to happen. I don’t have a crystal ball. I wish I had a ball.”
Denning points out that it is difficult to predict student behavior. Dramatic cuts to federal loans could shift students to cheaper programs. It can also send them into the private loan market. After all, he says, while the new loan limits are about the same as in 2006, before Grad PLUS, they are actually “much lower” because they don’t account for two decades of inflation.
“We needed loan limits,” said Baum at the Urban Institute, “but these limits are excessive.”
As for the potential impact on college costs, Baum predicts, “It’s not like prices will go down. They might go down a little bit.”
And he worries that the restrictions will go into effect so suddenly that they could put graduate school out of reach for some low-income students — a concern shared by Dominique Baker, an associate professor of education and public policy at the University of Delaware.
“We have strong evidence of what happens when we reduce access to financial aid,” Baker said, “and that is that students drop out of enrollment.” Especially low-income students who may not have the type of credit history to qualify for private student loans.
Recent analysis suggests that these new limits will affect about 30% of graduate borrowers.
In his testimony before lawmakers, Education Secretary McMahon said several times that some graduate schools had already lowered their rates before the big change.
NPR tracked down the Department of Education for a list of those programs, some of which offer discounts on new scholarships. They include:
Borrowers are likely hoping that this short list will get longer – and quickly.
