Unlimited graduate student loans mostly benefit wealthy universities

Recent research, which I covered in Forbes last month, confirms what many have long suspected: unlimited federal lending to graduate students allows universities to capture those taxpayer dollars by raising their prices. The result is higher tuition and larger student debt burdens, with no impact on degree completion or students’ long-run earnings. The research bolsters calls to restore a commonsense cap on federal lending to graduate students.

The federal Grad PLUS program, which provides effectively unlimited loans for graduate education, has downsides for both students and taxpayers, who must pick up the tab when students fail to repay their federal loans in full. The main beneficiaries are universities, which benefit from greater tuition revenue. A closer look at the data shows that the universities which draw the most funding from Grad PLUS tend to need it the least.

Wealthy colleges use an outsize proportion of Grad PLUS dollars. Universities where core institutional expenditures—excluding auxiliary enterprises like dormitories and hospitals—exceed $45,000 per full-time equivalent student enroll just 24 percent of graduate students. However, they draw 39 percent of Grad PLUS loan amounts. By contrast, institutions with core expenditures below $15,000 per student enroll roughly the same share of the graduate student population, but draw just six percent of Grad PLUS dollars.

These facts suggest that Grad PLUS dollars flow largely to institutions with the least need of additional taxpayer funding. The story is similar when defining university wealth by endowments. Schools with endowment assets exceeding $50,000 per student enroll 29 percent of graduate students, but draw nearly half of Grad PLUS loans.

Wealthy universities ought to use their tax-advantaged endowments to reduce tuition for students. If they did so, their students should have less need to rely on federal student loans. Instead, colleges with more resources tend to make greater use of the student loan program, exacerbating rather than ameliorating disparities in resources between the wealthiest universities and everyone else.

The University of Southern California (USC) draws the most funding from Grad PLUS, having raked in $265 million during the 2020-21 academic year. Among the programs that Grad PLUS financed was a $110,000 online master’s of social work degree, which recently became the subject of a class-action lawsuit alleging the university misled students. A Wall Street Journal investigation revealed that graduates of the program owed twice as much in federal student loans as they earned after graduation.

The list of schools that draw the largest amounts from the Grad PLUS program is dominated by wealthy private universities, including New York University ($233 million), Columbia University ($149 million), Northwestern University ($130 million), and Georgetown University ($126 million). USC and NYU each receive more Grad PLUS funding than all the Historically Black Colleges and Universities put together.

Given all this, the case for eliminating Grad PLUS and restoring a commonsense cap on federal lending to graduate students is clear. A limited federal graduate loan program, supplemented by private credit, could easily meet student demand for graduate education finance while arresting tuition inflation and holding down student debt. The biggest losers from such a change would be those universities with plenty of other funding sources to draw upon. The interests of students and taxpayers should outweigh the interests of USC and NYU.

You can explore the top 25 recipients of Grad PLUS funding in the table below (link to larger version).