How much more MN grad students will pay for loans

$10 bill

We’ve all probably heard about how Pell Grants — the main federal need-based financial aid source for undergraduate students — have been spared in the recent debt deal.

But graduate students are paying the price. To pay to keep the Pells, the feds have eliminated the subsidy on federal student loans for graduate students.

(The subsidy is essentially the payment of some of the interest costs. The government pays the 6.8 percent interest rate while the students are in school, so they don’t have to start paying until a number of months after they graduate. Under the new law, beginning next July 1 the interest on those loans will begin to accrue even while the students are still studying.)

The move could affect the more than 48,000 students who will be seeking graduate and professional degrees (law, medicine, etc.) on campuses in Minnesota. And it will hurt those in fields — such as medicine and Ph.D. programs — that take the longest to complete.

A state Office of Higher Education official said they’re not sure how many of those actually have subsidized loans. But a University of Minnesota official said that 43 percent of the U’s 18,334 graduate and professional students enrolled in spring 2010 had them.

So how big will the impact be on the average Minnesota grad student?

To the point: Up to $10,000 more on a four-year loan paid off over 10 years, though other estimates vary. (Calculations to follow.)

It’s tough to nail down the actual hit, considering factors such as the varying costs of programs, how long students take to pay off their loans, and how much they actually borrow in light of teaching assistantships and other sources of income.

But two local higher-ed officials agreed to give it a shot.

Assuming that a two-year master’s student took out the maximum $8,500 a year at a rate of 6.8 percent, a back-of-the-envelope calculation shows he or she would end up paying roughly $3,400 in extra tuition for a two-year program, said Meredith Fergus, policy analyst for the state Office of Higher Education.

(But that’s not counting the added cost in interest of paying off the loan over a number of years.)

For a four-year graduate degree it gets worse.

Dan Gilchrist, a federal relations lobbyist for the U, forwarded to me an e-mail (which I’ve lightly edited) written by Kris Wright, director of student finance for the U:

Let’s say a typical grad or professional student is in school for four years and each year they borrowed $10,000 in subsidized loans. (We’re using $10,000 instead of $8,500 for ease of calculation.)

  • Over the course of the first year, the loss of the subsidy will cost them $680.
  • The next year they borrow $10,000 and they owe interest on $10,680; their interest cost for the second year is $680 plus $726 (6.8% x $10,680) or $1,406.
  • The third year they borrow another $10,000, and their interest cost is $680 + $726 + $776 (6.8% x $11,046) or $2,184.
  • The fourth year they borrow $10,000.  Their interest cost is $680 +$726 +$776+$804 (6.8 x $11,822) or $2,986.  The total additional increase in interest is $680+$1,406+$2,184+$2,986 or $7,256.
  • So that’s $7,256 on $40,000 in loans, taking out $10,000 in each of 4 years. The student would start off paying on $47,256, because the subsidy was lost.

So it’s more than $7,000 in extra costs — and that’s just starting out.

If a student took 10 years to pay it off (and many take longer than that), he or she would owe about $10,000 more because of the loss of the subsidy, Wright said. (That’s about $65,260 vs. $55,239 in total principal plus interest.)

For other numbers: National student-aid Mark Kantrowitz of estimates the average borrower will pay an extra $7,000 in interest. Gilchrist said the Association of American Medical Colleges estimated in one presentation that it will cost the average medical student an extra $10,000 over the life of the loan.

(That’s not necessarily considering the maximum debt. Grad students can rack up to $138,500 in federal student loans — $65,500 of that subsidized. But that’s not typical.)

When combined with recent state tuition hikes, that’s part of a “compound tuition increase,” said Abou Amara, president of the Graduate and Professional Student Assembly of the University of Minnesota system.

He told me:

“I knew we had to be part of the solution, but I think the proportion (of the burden) we’re bearing is unfair.”

(He said the change won’t affect him, because he’ll be out of school before the change kicks in.)

Amara said it could cause some students to think harder about whether to attend grad school.

“I have already talked to some prospective students who say cost is already a significant factor. I’m afraid that as they get pinched on both ends, and costs continue to increase, this will deter a lot of people or (at least) be a strong factor (in their decision). … which is ironic, because in an economic downturn, many go to school.”

So why grad loans instead of Pell Grants?

The vibe I’ve gotten after calling around to officials is that Pell Grants were deemed more important. They’re the path into college for many low-income, first-generation students, so it was seen as crucial that they get their first shot.

Grad students, in contrast, are seen as older, more established types who know the ropes and already proven themselves for the job market — a market in which they’ll make some decent money.

But Amara said if students don’t go to grad school, he said, society will suffer. After all, two medical breakthroughs — involving open-heart surgery and bone-marrow transplants — involved the University of Minnesota, he said.

“It’s a misnomer that students who go to grad school are only benefiting themselves. I mean, do we want citizenry with the skill set to contribute?”

He said that by pitting undergraduate financial aid vs. graduate financial aid, “we’re treating it as an either-or, but we should be treating it as an ‘and.'”

Wright of the U’s student finance division was blunter:

“The thing that’s most troubling is that it’s cannibalizing one program to pay for another. What are we going to cannibalize next? It’s very frustrating.”