Graduate Student Borrowers Behind Big Increases in Taxpayer Losses

As student loan debt continues to boil up to crisis proportions, the public is becoming aware of some chilling facts. Among the more common ones are that total student loan debt now surpasses $1.3 trillion and the average debt carried by more than 40 million student loan borrowers is $31,000. Even more chilling, as of the end of 2016, 11.3 percent of student loans are in default and more than 40 percent of student borrowers are not making payments (which may lead to default).

Now the Congressional Budget Office is reporting that the taxpayers stand to lose $134 billion on student loans over the next decade. This next fact, however, is harder to understand. The segment of student loans that will drive taxpayer losses the most over that period will come from graduate student loans. Huh?

Currently, graduate student loan losses account for 18 percent of the $134 billion in taxpayer losses. But that is expected to increase to 31 percent over the next decade. The increase in graduate student losses will account for more than half of the total increase in student loan losses.

If Graduate Borrowers are Safe, Why the Losses?

Graduate student loans are considered the safest among all federal loans because the borrowers earn more money that can be used to repay the loan. The default rate among graduate borrowers is just 7.6 percent as compared to more than 25 percent for undergraduate loans. So, if graduate borrowers are defaulting at a much lower rate, how would that drive up taxpayer costs on student loans?

The first thing to understand is that graduate loans are typically much larger than undergraduate loans. For that reason, they are also more expensive with higher interest costs. Although most graduate borrowers can afford to repay their loans, many are expected to take advantage of income-driven repayment (IDR) plans. With IDR plans, borrowers can lower their payments based on a percentage of their income.

Regardless of the size of their loan or their interest rate, which are both typically larger than an undergraduate loan, a graduate borrower earning $40,000 will pay the same monthly amount as an undergraduate borrower earning the same income.

While graduate borrowers using IDR plans underpay their loans, the cost to taxpayers who must covert the government’s borrowing costs increase. The costs can be expected to increase even faster when interest rates rise. Policymakers looking for ways to cut the federal deficit have taken notice and some are considering the privatization of graduate student financing.

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