Subsidized loans for gradate school help economy

Students at UAA are all too familiar with the rising cost of college education. Protests on campus last year demonstrated that many students were not pleased with the Board of Regent’s proposed tuition hikes. I suspect that proposed tuition hikes in the future will be met with a similar response. Well, if you’re a UAA student who was planning on attending graduate school, you might want to think again.

As part of the recent debt ceiling compromise, Congress has eliminated subsidized federal loans for graduate students (they have also doubled the interest rate on subsidized loans for undergraduates, but that’s another story). A subsidized loan, or “interest-deferred loan,” allows students to attend school without accruing interest. Interest on a subsidized loan kicks in the day of graduation. However, Beginning in July of next year, students using the Federal Direct Student Loan Program (FDSLP) to help pay for graduate or professional school will begin accruing interest immediately after taking out the loan. Most students who take out loans for graduate school are unable to pay back anything during their education, meaning the interest on their loan will compound year after year. This will result in unprecedented levels of student loan debt. As an example, the average law student today graduates $75,000 in debt. After subsidized loans are done away with, this number will be closer to $90,000.

Congress has made the wrong decision for three reasons. First, they’re being hypocritical. Second, they’re hurting students who need subsidized loans the most. And third, they’re making it more difficult for American citizens to compete in a globalized, information-based economy.

On the first point; Harry Reid (D), Mitch McConnell (R), and John Boehner (R) all agreed that increased revenues (read: more taxes) would not be part of the initial spending cuts associated with raising the debt ceiling. Well, by doing away with subsidized loans, Congress is effectively imposing an additional tax on graduate students.

Let’s be clear – a subsidized loan is still a loan. It still must be paid back. Students still pay interest. The only thing that’s “subsidized” on a subsidized loan is the interest accrued during the time spent in school. Unless a student defaults on their loan, the lender (the U.S. Department of Education for almost all subsidized loans) will make money through earned interest. The government isn’t “losing” any money by subsidizing a loan.

The money earned through interest goes back to the United States. By definition, any money collected by the government in exchange for services is a “tax.” A subsidized loan can be thought of as a “tax break” for graduate students. The government provides a service – a low interest loan backed by the full faith and credit of the United States – and in return the government asks for a “tax” by charging students interest once they graduate. Congress has effectively eliminated this tax break, raising the tax imposed on graduate students.

In other words, Congress has decided to raise revenue, albeit through a roundabout mechanism. Congress refused to raise revenue by ending the Bush Tax Cuts, closing tax loopholes for the wealthiest corporations, or raising the Capital Gains Tax. Instead, they have imposed a tax on students seeking graduate degrees. Why is it that graduate students should be asked to pitch in and close the deficit, while the wealthiest Americans should not?

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Now, let’s consider the impact this policy has on education. Students who are on the fence about going to graduate school, because of the cost, may now be deterred from attending graduate school. Students that considered medical school, law school, pharmacy school, or business school may now decide it is not in their interest to pay more for their loans, and choose less lucrative careers. This is turn results in less taxable income, and ultimately, less revenue for the government.

Congress could not have picked a worse time to implement a policy like this. The rising cost of graduate-level education and dwindling resources available for grants and fellowships means that an increasing number of students are relying on loans to pay for graduate school.

Let’s look at pharmacy school as an example. The pharmaceutical market is one the most profitable in the world. Despite the recent economic turmoil, individuals with graduate-level pharmacy degrees are in extremely high demand. As such, the cost of attending pharmacy school has risen by more than 50% in the last eight years. It now costs as much as $100,000 to receive a graduate degree in the pharmaceutical sciences. The same is true for almost all other graduate programs and professional schools.

According to U.S New and World Report, “the University of California system recently warned it will raise professional school tuition by as much as 31% in 2011.” Law Schools and Medical Schools across the country are raising tuition at an alarming rate. The research fellowships and TA positions that students once relied on to pay for graduate school cannot keep up with the inflating cost of education. Graduate students taking out loans has been a growing trend, and now those loans are more expensive.

In terms of the globalized economy, doing away with subsidized loans will make America less competitive. NPR reports that our nation’s top tier graduate schools (MIT, Columbia, and Berkley) are enrolling an increasingly large number of foreign students. In 2010, MIT granted more engineering PhDs to resident aliens than to American citizens. This is because foreign governments understand the value of highly specialized degrees in a globalized, information-based economy. To the best of their ability, they subsidize the education of their students, sending them to the best graduate programs in the world. The students then return to their home countries, doing wonders for their domestic economies, and fostering competition in the global economy.

The United States cannot rely on cheap labor to power its economy. Nor can it rely on low-skilled workers. The United States must make new investments in education, but it seems Congress is moving in the opposite direction.