“The cost of college is simply prohibitive. Students are saddled with debt…” McMahon told the House Education Committee in May. “We really need to do something to lower the cost of college.”
With that goal in mind, Republicans used last year’s One Big Beautiful Bill to derail the program known as Degree PLUS and limiting graduate loans. The thinking is this: borrowers will choose cheaper programs, and expensive schools will have to lower prices to compete.
But many economists aren’t so sure it will do what Republicans say it will.
A decades old idea
The idea that there is a connection between federal student loans and what colleges charge goes back almost four decades, to February 18, 1987.
That’s the day then-Secretary of Education William Bennett, under President Ronald Reagan, wrote a scathing opinion about New York Timesentitled “Our greedy colleges.”
In it, Bennett criticized schools for tuition increases that outpace inflation and argued that increases in federal student aid “have allowed colleges and universities to blithely raise their fees, confident that federal loan subsidies will help cushion the increase.”
His idea caught on and economists called it the “Bennett Hypothesis.”
“Bennett’s hypothesis basically says that if you give more federal aid to schools, they will respond by raising the price,” says Philip Levine, a professor of economics at Wellesley College.
Almost 40 years later, Republicans are dusting off Bennett’s hypothesis to justify tight restrictions on student loans.
Graduate school is fueling the explosive growth of student debt
To be clear, current restrictions are included bachelor loans don’t change – and haven’t for years. One reason: According to Levine, the net cost of bachelor’s programs — what families actually pay — has been pretty stagnant lately.
“We’ve seen at the undergraduate level over the last five or so years that college costs are actually relatively flat,” said Preston Cooper, who studies higher education policy at the conservative American Enterprise Institute (AEI).
But the price of graduated the school has increased significantly.
“We’re at a point where almost half of the loans are now among graduate students, even though they’re a much smaller share of the general population,” said Robert Kelchen, a professor of higher education at the University of Tennessee, Knoxville.
Which brings us to Grad PLUS, which the Trump administration plans to shut down on July 1st.
For two decades, Grad PLUS has operated as a supplement to the traditional loan program, allowing graduate students to effectively borrow as much as they need—without limits or safeguards.
Cooper says it’s not a stretch to think that Grad PLUS has helped raise the cost of higher education.
“Until now, it’s been a very easy answer (for schools) to basically raise revenue a little bit each year by just raising the cost of high school tuition because they know the federal government is going to have to loan their students for that extra cost.”
What the research shows
“I think having essentially unlimited borrowing is not a good policy,” says Jeff Denning, an economist and professor at the University of Texas at Austin.
Denning was part of a team of researchers who studied the Grad PLUS program – to put Bennett’s hypothesis to the test. They wanted to know if Texas’ suddenly unlimited Grad PLUS loan font, which began in 2006, had contributed to higher graduate program prices.
The short answer: Yes.
The the researchers write that for every additional dollar received by students in loans, higher education institutions raise their prices by $0.64 (after taking into account the grants they provide).
Republicans often cite Denning’s work as justification for ending Grad PLUS, arguing: If schools have increased their prices nearly as much as federal aid has increased, why shouldn’t the reverse be true? Less aid should lead to lower prices.
But it’s not that simple, says the University of Tennessee’s Kelchen, who has also studied the impact of Grad PLUS, specifically on business, medical and law schools.
“I found no evidence” of a direct link between federal aid and prices, Kelchen says.
Even Denning, when asked if Bennett’s hypothesis is true, says, “It depends. I think there’s some evidence that it happens under certain circumstances, and there’s evidence that it doesn’t.”
Bennett’s hypothesis is a “logical conclusion,” according to Kelchen, “if you think of these graduate programs as huge profit centers.” Some are, he says. Some are not.
Medical school, for example, “is extremely cost-effective” for schools, Kelchen says. “It can take a million dollars in resources to get one medical degree. So limiting loans won’t reduce those costs.”
Overall, he adds, the evidence supporting Bennett’s hypothesis “is largely mixed.”
Levine says much of the increase in the cost of higher education over the years is due to a phenomenon known as “spending disease.” what is this
Well, over time, most businesses tend to become more efficient, Levine says, which helps them control costs while increasing wages. But higher education doesn’t work that way.
“As wages rise elsewhere, colleges have to keep pace to attract workers who could be working elsewhere. Ultimately, costs rise to produce the exact same product.”
A half-dozen economists and higher education experts NPR spoke with agreed on one thing: Whatever its impact on prices, the Grad PLUS program as a policy was wrong.
“I think there was a broad consensus that the idea of allowing graduate students to borrow endless amounts of money was not a good idea,” said Sandy Baum, a senior fellow at the Urban Institute, a nonpartisan think tank.
But regarding Bennett’s hypothesis, Baum is skeptical: “There are a lot of studies on what causes college price increases and on the effects of student aid increases. And most of them find that in some cases … particularly for-profit institutions, it’s true. But mostly it’s not true.”
Instead, Baum argues, price spikes have been driven by a host of factors, from the “spending disease” and student loans to rising costs of insurance, technology — even the cost of living.
Will ending Grad PLUS force colleges to cut prices?
So what are we to make of the current Republican claim that student loan cuts for graduate students will lead to lower prices?
AEI’s Cooper agrees with the end of Grad PLUS, but doesn’t expect an immediate drop in prices.
“I don’t want to promise that in the first year, everybody’s going to cut costs and, you know, it’s going to be great,” Cooper says. “But I think that will create some pressure (on prices) over time.”
The University of Tennessee’s Kelchen keeps his expectations low.
“I expect to see at most a small decrease in tuition as students may become a little more price sensitive and shop a little more institutions,” says Kelchen.
Wellesley’s Levine says drastic price cuts are unlikely: “Could this contribute to some small change in graduate pricing? Maybe. … Colleges don’t just make up their prices. Colleges have costs, and it has to be the case that the revenue they generate covers their costs.”
Even Denning, whose research has found the clearest evidence of a link between federal loans and college prices, says of these new loan limits potentially driving down prices: “It’s certainly possible. I’m not sure it’s going to happen. I don’t have a crystal ball. I wish I did.”
Denning points out that it is difficult to predict student behavior. Dramatic reductions in federal loans could shift students to less expensive programs. This could also lead them to climb into the private loan market. After all, he says, while the new loan limits are about the same as they were in 2006, before Grad PLUS, they’re actually “much lower” because they don’t account for two decades of inflation.
“We needed credit limits,” says the Urban Institute’s Baum, “but those limits are finite.”
As for the effect they could have on college prices, Baum predicted, “It’s not like prices are going to drop sharply. They may go up more slowly.”
And she worries that the restrictions go into effect so suddenly that they could put graduate school out of reach for some low-income students — a concern shared by Dominick Baker, an associate professor of education and public policy at the University of Delaware.
“We have really strong evidence of what happens when we reduce access to financial aid,” says Baker, “and that’s that students stop enrolling.” Especially lower income students who may not have the credit history to qualify for a private student loan.
Recent analyses estimate that these new restrictions will affect approximately 30% of graduate borrowers.
In testimony to lawmakers, Education Secretary McMahon repeatedly said some colleges had already cut their prices ahead of the big change.
NPR reached out to the Department of Education for a list of these programs, some of which offer discounts through new scholarships. These include:
Borrowers are likely hoping that short list gets longer – and fast.
