Debt Debate Hits Students

The summer’s debt ceiling and deficit reduction debate cut over a trillion dollars in government spending and increased scrutiny of nearly every aspect of the federal government. One such target was federal support for higher education, which was slashed by nearly $22 billion over the next ten years.

The cuts included the elimination of subsidized graduate student loans and a special credit for students who make their loan payments on time for at least 12 months. Of the $22 billion saved, about $17 billion will be directed toward preserving funding for Pell Grants, one of the main federal aid programs for undergraduate students.

Graduate students, on the other hand, will bear much of the brunt of the recent series of cuts. According to Richard Vedder, the director of the Center for College Affordability and Productivity, graduate student aid represents a more appealing political target.

“It is less politically popular to say that we will also provide support through the master’s or PhD or professional school level,” he explained.

**Reverberating Effects on the Farm
At Stanford, the loss of a significant pool of federal aid will have considerable impact on student debt. Karen Cooper, director of the Stanford Financial Aid Office, said that the recent federal cuts would force graduate students to seek alternative sources of funding and could increase levels of debt at the margin.

Prior to the recent legislation, graduate students were able to borrow up to $8,500 through a subsidized direct loan program. Next year, that option will no longer exist, so interest will accrue during in-school and grace periods. In short, as Cooper said, “The loan will be more expensive.”

Furthermore, Cooper indicated that a second federal aid program – the Perkins Loan Program – may be on the “chopping block” as well. The Perkins program provides Stanford with a large amount of money to create a revolving fund used for subsidized loans. According to Cooper, the government has not provided additional funding since 2000, but could choose to take the money back. The overall pot – a mixture of federal and Stanford money – represents nearly $80 million and is used in $6,000 increments per student per year.

Cuts to such programs could also have a disproportionate effect on Stanford’s graduate students. As financial aid programs for undergraduates have grown increasingly generous, Stanford has focused federal aid more and more toward the university’s graduate students.

So far, the programs have kept debt levels low by national standards. According to Cooper, over the past decade “graduate debt has not changed significantly.” However, without access to a variety of now eliminated or threatened federal programs, graduate students will be forced to seek other sources of funding or simply incur more debt.

**Undergrads Next
While graduates have been hit hardest thus far, many higher education experts have said that undergraduate aid could be next. According to Mamie Lynch, a policy analyst at the Education Trust, undergraduate aid programs may face future cuts as well. “Pell Grants will be preserved for the first year, but in the year after, there could be more cuts,” she explained. “And Pell would be in danger under those cuts.”

A number of factors make federal higher education aid an increasingly likely target for spending reductions. According to higher education expert Richard Vedder, the political risk associated with cutting federally-backed student loans is significantly smaller than the risk of scaling back the political lightning rods of Medicare and Social Security. Even many Democrats, Vedder said, have become increasingly open to the idea of placing performance standards or additional timing restrictions on Pell Grants.

At Stanford, Karen Cooper remains concerned about such potential reductions. She called the Pell Grant program the “main bedrock of federal financial aid” and said cuts would have significant implications for the financial aid landscape.

However, Stanford is relatively well positioned to cope with any such reductions in federal aid. Levels of borrowing of Stanford undergraduates remain quite low compared to the rest of the country – both in terms of average debt and the percentage of students graduating with some amount of debt. And Stanford’s endowment-backed financial aid program is one of the largest in the country.

“You would think at a high cost institution like ours, you would see more borrowing,” Cooper commented. “But I attribute [the low levels of debt] to the financial aid program.”

As student borrowers across the country take on increasingly unsustainable levels of debt, Stanford students continue to manage their debt levels well. According to Cooper, Stanford’s federal cohort default rate was less than 1% for all students across undergraduate, graduate, and professional programs. That default rate is substantially below the nearly 9% average default rate at the national level.

**Growing Debt Pool
Stanford students’ relatively constant levels of debt over the past decade remain an exception. At the national level, student debt, driven by rising costs of higher education, has skyrocketed. According to Malcolm Harris, an education contributor for n+1 magazine, student debt now totals nearly $1 trillion and has “surpassed credit cards as the nation’s single largest source of debt.”

Costs have significantly outpaced inflation, growing at an average rate of 6-7 percent per year over the past few decades. According to Richard Vedder, growth rates at that level “signify a doubling of costs every decade and a quadrupling over two decades.”

And according to many commentators, the growth in costs shows no signs of abating. “You don’t have to be Miss Cleo to see increases in the near-future,” said Harris. “The UCs are seeing another year of huge increases, for example. At the rates of tuition inflation, huge increases have been the standard for a couple decades now.”

According to Karen Cooper, the current model of higher education necessitates these costs. “As long as we continue to have this sort of labor intensive system for universities,” costs will remain high, she explained. “The way that we educate students is expensive, and it’s going to continue to be.”

Growing levels of debt as a result of cost increases have made federal financial aid programs more impactful but have also placed such aid programs at risk. As Richard Vedder explained, “The student debt crisis has increased the willingness to consider restrictions or modifications on student loan programs.”

While additional cuts may indeed be looming, many experts do not foresee further action prior to the 2012 election. Ultimately, Vedder maintains, “The stage has been set for some long-term cutbacks in federal aid programs.”

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