Eliminate Subsidized Loans to Graduate Students

The federal government operates programs to help students and their parents pay for postsecondary education. Subsidized Stafford loans help students with demonstrated financial need pay for their education, and unsubsidized Stafford loans are available, without regard to need, to any student. (The labels "subsidized" and "unsubsidized" refer to the terms of the loans, not to whether the federal government incurs subsidy costs for the program.) Borrowers of both subsidized and unsubsidized loans benefit from interest rates that are not generally available to those without a demonstrated credit history or collateral and from deferment of repayment until six months after a student leaves school. Students with subsidized loans benefit further because the government also forgives interest on those loans while the students are enrolled and for six months after they leave school. Also, most loan programs offer flexible repayment plans that allow for extended repayment periods or that cap required monthly payments at an amount intended to be manageable, based on income and family size.

This option would end, in 2012, the practice of making new subsidized loans to graduate students, on the presumption that those students would generally take out unsubsidized loans instead. The option would reduce federal outlays by more than $8 billion from 2012 to 2016 and by about $18 billion from 2012 to 2021. (The Federal Credit Reform Act of 1990 requires that the fed eral budget record all costs and collections associated with a new loan in the year in which the loan is disbursed.)

An argument for this option is that graduate students who lose access to subsidized loans would be able to take out unsubsidized federal loans for the same amount and still benefit from few or no requirements with respect to credit history or collateral and from repayment options that take into account borrowers' financial circumstances. Another argument in favor of this option is that it would help focus federal student aid on the area that some people believe is the federal government's primary responsibility-- making a college education available to all high school graduates. According to that rationale, graduate students have already received the benefit of higher education.

An argument against this option is that graduate students often amass large amounts of debt because of the number of years of schooling required to complete advanced degrees. Without the benefit of interest forgiveness while they are enrolled in school, that debt would be substantially larger when they entered the repayment period because the cumulative interest on the money borrowed over the years would be added to loan balances. Also, opponents of this option might argue that federal support for graduate students is no less important than support for undergraduates because graduate students are most likely to effect scientific, technological, and other advances that will benefit the nation as a whole.