States Creating Graduate Loan Programs Should Tread Carefully

With the federal Grad PLUS program phasing out this year, blue states have launched or expanded their own graduate student loan programs. This week, Minnesota unveiled the SELF Grad Loan , following Connecticut’s introduction of the universal MyCHESLA Grad Loan last month. Boosters tout these loan programs as a direct rebuke to President Trump, who signed a bill last year to end Grad PLUS and cap federal lending to graduate students. But if states don’t tread carefully, these loan programs could repeat the mistakes that bedeviled Grad PLUS—and ultimately led Congress to axe the loan program entirely. Under Minnesota’s plan, most graduate students may borrow $50,000 per year, up to a cumulative maximum of $150,000. That’s on top of federal loans, which provide $20,500 per year ($100,000 in aggregate) for most graduate students. Minnesota students enrolled in “select doctorate programs”—limited to medicine, dentistry, pharmacy, and veterinary medicine—may borrow up to $300,000 cumulatively, with no annual limit. Federal loans already provide up to $50,000 annually, with a lifetime limit of $200,000 for students in professional programs. Connecticut’s program will also allow students to borrow up to the “net cost of education,” presumably defined by the institution. One saving grace is that the program will consider students’ future expected earnings in the underwriting process, though the details of how this will work are not yet available. Providing access to graduate school motivates states’ desire to create these programs. But guaranteeing access to any graduate school, of any quality, at any price is a mistake. The same idea led to unconstrained lending under Grad PLUS, and we’re still living with the consequences: $1.7 trillion in student debt (about half of that for graduate school), with millions of students failing to see a return on investment on their degrees, colleges hiking tuition , and loan repayment rates plummeting . Because Grad PLUS allows students to borrow as much as their institution said they needed, many programs load students up with debt they cannot reasonably afford to repay. Northwestern Health Sciences University, which will participate in Minnesota’s SELF Grad Loan, offers a master’s degree in alternative medicine where students take on an average of $106,000 in debt —against earnings after graduation of just $39,000. For students’ sake, Minnesota may want to think twice about funding degrees like that. The new loan initiatives represent a missed opportunity for states to think more deeply about what reasonable borrowing for graduate education should look like. Under Minnesota’s SELF program, all graduate students can borrow up to $150,000. It would be catastrophic for a teacher or social worker to borrow that much, but it could be more reasonable for an advanced healthcare practitioner. States should make such determinations themselves instead of allowing high limits for all programs, as that creates a perverse incentive for schools to raise tuition in order to capture additional loan dollars. High borrowing levels also represent a major fiscal risk to states. Perhaps due to a worry about bleeding money, SELF provides no income-contingent repayment option; students must repay their loans like a mortgage. This reduces the subsidy cost of providing the loan, but increases the risk to students if debt becomes outsized compared to earnings. That makes it all the more important for states to do appropriate due diligence on the front end, such as considering individual programs’ track records and setting lower loan limits for programs with worse outcomes, to ensure students only take on loans they can afford. States rushing to create loan programs should be careful. In their haste to guarantee access to graduate school, they may simply shift the student loan crisis from the federal to the state level. Graduate loans can be a useful tool, but lending with few constraints is a mistake. The federal government—and America’s student borrowers—have already learned this lesson the hard way. States should try not to repeat history. The post States Creating Graduate Loan Programs Should Tread Carefully appeared first on American Enterprise Institute - AEI .