Graduate Students Bear the Brunt of the Budget Crisis

September 2, 2011

Whether you consider yourself a Conservative, Democrat, Liberal, Republican, red, blue, or some hue of purple; we can all agree on the importance of our education and financial future.  For those of you who are unaware, in an effort to manage the debt crisis this country is currently facing, starting July 1st, 2012 the government will cut funding for subsidized graduate student loans. 

Under current legislation, the government offers subsidies that help students with the interest accruing on loans while they are in school and during a six-month grace period after the student graduates.   The government also provides a rebate on the origination fee taken from the loan, pending the student makes the first 12 monthly payments after graduation.  In accordance with the new amendment to the Higher Education Act of 1965, students attending graduate or professional programs will no longer be offered this aid.

I sat down with Marc Berman, Director of Financial Assistance here at Thomas Jefferson School of Law, to get a better understanding of the situation.  Marc explained that, “The criteria to obtain a loan and the availability of money is not going away, it is just that the cost of borrowing is going up.”

So what does this Mean?

The Stafford Loan currently has a $20,500 maximum award with an origination fee of 1% — $8,500 of which is subsidized, $12,000 which is not, with a .05% rebate on the origination fee.  After July 1st, 2012, the entire Stafford Loan maximum award will now be $20,500, unsubsidized, with an origination fee of the full 1%.

The new amendment has a double affect on students borrowing money from the subsidized Stafford Loan.  First, the government will no longer help with interest accrued on the principal during the student’s time in school, meaning the student will be responsible for all interest accrued on his/her loan.  Secondly, and more importantly, students borrowing the maximum Stafford Loan will now be accruing interest on the full $20,500 over their entire education (pending the maximum award is borrowed) instead of the original $12,000.  As you may have guessed, this means just one thing for graduate and professional students:  more debt!

Why is this happening? 

The amendment was part of the Budget Control Act of 2011 that Congress so graciously debated and passed this past summer.  According to an article written by James Rosen on FoxNews.com STUDENT DEBT: America’s Next Bubble?, it seems that student debt has grown 511% over the last 12 years.  Rosen claims that this “bubble”, much like the “housing bubble” or the “dot.com bubble”, is affecting the American economy.  According to Rosen, because students focus on paying off their debt post graduation, they delay making major purchases or financial investments, and this leads to “$5 to $10 billion being sucked out of the economy each month.”  Rosen also mentions the lack of a job market, which leads to students defaulting on their loans all together.

So, if the enormous student debt is such a factor weighing on the economy, does it make much sense to pile on more debt and further bog-down those who are trying to continue their education in an effort to contribute to society?  Let’s not forget, these cuts to student loans came from an effort to relieve the federal government’s debt deficit.  Out of all the programs the federal government funds i.e. pensions, welfare, defense, protections, education, etc.; education amounts to just 3% of the total budget, while defense takes 25% and government pensions take 21%.  Moreover, according to a letter written from the Congressional Budget Office to Speaker Boehner, the expected savings from cutting this funding will only amount to roughly $27 billion over the next decade.  That is equivalent to how much the government shells out for just three months in Afghanistan.  So does that mean if the “war” in Afghanistan ends any time in the next ten years the government reimburse us?  Don’t count on it. 

What Can You Do?

Other than vote to change your respective Senator and/or Representative next term, there is not much that can be done at this point; the subsidized loans are gone.  Starting fall of 2012, all graduate and professional students requesting federal loans will feel proud that they are doing their part to help the suffering economy.  Other than that, Mr. Berman encourages us students to, “Look closely at our budgets and borrow as little as possible.”  Mr. Berman also offers that students should consider “income based repayment” which allows the post-graduate to repay his/her loan based on the income s/he is earning at the time.  Mr. Berman reassuringly adds, “We prefer that this doesn’t happen, but the graduate population always seems to bear the burden.  However the burden can be minimized with the aid of income based repayments.” 

Plan wisely fellow students. 

Sources:

STUDENT DEBT: America’s Next Bubble?
By James Rosen
Published August 19, 2011
FoxNews.com

Debt Deal Would End Subsidized Loans To Grad Students, Produce Savings Equal To Only Three Months In Afghanistan
By Zaid Jilani
Published August 1, 2011
ThinkProgress.org

http://cbo.gov/ftpdocs/123xx/doc12357/BudgetControlActAug1.pdf

http://www.usgovernmentspending.com/piechart_2011_US_fed