Student Debt Scam: Uncapped Government Loans Benefited Colleges Not Students, Study Finds

The U.S. government’s attempts to expand access to higher education by lifting borrowing limits for graduate education failed, according to a new study published by the National Bureau of Economic Research.

The paper by a trio of economists—Sandra Black of Columbia University, Lesley Turner of Vanderbilt University, and Jeffrey Denning of Brigham Young University—looks at a 2006 reform that effectively uncapped student loan borrowing for graduate programs. These are no small part of student indebtedness. Indeed, graduate loans now make up around 47 percent of all new student loans.

It finds that lifting the borrowing limits did not improve access to student loan programs. Neither did it improve enrollment by underrepresented groups. Access to additional loans also did not increase the likelihood that a financially constrained student would complete his or her degree or persist in the program.

The main effect was to increase how much students borrowed and to shift lending from the private sector to the federal government. Instead of owing a smaller amount to a bank or other student loan lenders, borrowers wound up owing more to the government.

In effect, the program—called Graduate Plus—just allowed colleges to raise tuition and saddled students with more debt. In fact, in programs with students that were more likely to be financially constrained before the borrowing limits were lifted, tuition went up dollar for dollar with the loans.

“Grad PLUS-driven increases in federal student loans did significantly increase prices,” the economists write. “Our results suggest that Grad PLUS loans primarily benefited institutions and programs that were able to charge higher prices.”

Even nonborrowers suffered because they also were burdened by the price increases.

“Our results raise important questions about the benefits of essentially uncapped government-backed loans for graduate school and the need for future research on the consequences of increased debt burdens for students who do not receive a commensurate rise in their human capital,” the economists conclude.