Student Consequences and Future Policy

This message comes from Capital One Commercial Bank. Access comprehensive solutions from a top commercial bank that prioritizes your needs today and goals for tomorrow. Learn more at capital onene d. com slash commmercial member FDC. This is Planet Money from NPR The Trump administration is taking a new approach to a very sticky problem in the United States, that of student loan debt All nearly one point seven trillion dollars of it The Department of Education has a plan to bring down tuition costs beginning today, july first. What is that plan? Well Education Secretary, Linda McMahon recently described it to lawmakers at a committee hearing on Capitol Hill. We want to bring down the cost of education. Yeah, so far, so good, following that Then she describes this big change to the federal program that loans students money for school. We've put in caps on programs for graduate students and undergraduate students to make sure that we can help reduce the cost and the burden of college. Yeah, actually hold thereare for a second because that that is the confusing bit for me. I believe she said to quote reduce the burden of college The plan is to give less money to student borrowers And that's where I was really intrigued by their logic This is Coreoryy Turner, covers Education for NPR. Every time I run into Corey at the NPR coffee machine, he will tell me something about some new thing happening in education. And then months later, the thing has exploded into a front page story. And that is why I listened to Corey recently when he told me to go check out Secretary McMahon's tuition fighting plan plan basically is starting july first, if you want to get a graduate degree in most fields, the Department of Education, the biggest lender for student loans is saying that they're only going to give you about twenty one thousand dollars a year. That is the cap. If your tuition costs more than that, well sorry, the Ed department is not lending extra to cover it The administration's logic is based on this sort of old idea. and that is that if there's a lot of federal student aid floating around in the higher education marketplace Colleges have no incentive to lower their prices. And so if they cap federal student loans specifically for graduate students then the hope is colleges and universities all over the country will haveave no choice but to then lower their prices I have Many follow up questions. Yeah, so it sounds logical TheQion is Is it actually true? Hello and welcome to Planet Money.'maty Mone and I'm Coryurner, and Cory, I believe you haveve now called basically anyone who has had a hand in trying to study whether or not this proposal stands chance to work. That's right. Today on the show, Coreory tells us what he's found and tells us the roots of this Less money, less tuition problems, Is that what they're calling it? Lower loans, lower prices? I don't know. It might need workshops. Whatever the name of this is, the roots of this particular solution. This message comes from Schwab with the new Schwab teen invvestor account Tes can gain hands on investing experience and build positive money habits. It's an account co owned by you and your team, so you can monitor and engage with the account while your team learns how to invest and manage money. Learn more at schwab d. com This message comes from Capital O. Capital One offers checking accounts with no fees or minimums. What's in your wallet? Terms apply. See capital onene d. com slash bank guuy for details. Capital one N A meber FDIC This message comes from Odu. If you are currently overpaying on software to run your business, remember this number ten thousand. That's the number of new businesses that join Odu per month. Join Odu today at odu. com. That's Odoo. com we're going Bring college prices down. That's what we're about to do today? Yeah, I'm excited. College prices look out. you're going down Today we have invited NPR's Coreory Turner over to our Planet Money House because big things that may affect you, that may affect your kids, your higher edge dreams They are happening. There's a consensus that there's a problem with the size of federal student loan debt in America The question is, how do we fix the problem moving forward giveive less money up. G less money out. That is their proposal And so may I ask before we address that is the problem The money is being given out or that the money is needed, that college is so expensive. Why would you ask such a Gordian knot of a question? I see. o For the rest of the episode, we will try to untie that knot to understand what problem the Trump Department of Education is trying to fix specifically, why they think less money is the right approach, and simply Will it all work? But first somethingomething we must address. The administration's plan, the changes going into place today, They will affect some loans for undergrads through a program that lets parents borrow for their kids. But really, what we're talking about here The huge change is not about underground All about grad school. And Like what? Prepare to have your mind blowed. So here's the weird thing. So the cost of undergraduate college. not rising. What the net price of undergraduate four year programs has been stagnant for roughly ten years L Cy then, whenever I run like, I know, calculations for how much I'm supposed to save for my very young children for college. it's like, you might need millions of dollars. Wh Why are people telling me that? Well, so there is Chasmic difference between sticker price And that for us it got. Sticker price is what people actually p. Exactly. Sticker price has been rising steadily for a long time. Okay, send all your emails to Coreory, College net cost has not risen nearly as much as you may think. Undergraduate college, net cost, net net not sticker net has not budged much Cordy says schools advertise eye popping tuition rates, but after financial aid and scholarships, the amount that families actually end up paying for undergrad really has not been changing That may be different if you're wealthy and you're not getting financial aid, but Generally, yeah, grad school is the place where net tuition has really ballooned out of control. That's exactly right. Whenever people like me talk about the one point seven trillion dollars federal student loan portfolio. a huge chunk of that. is actually grad school dad It's fewer borrowers than undergraduate borrowers, but the debt itself, so much of it is actually graduate school debt Okay Well, Let's fix that problem, shall we? Here we go. All right. so The Trump administration's fix for this problem of ballooning grad school tuition, their idea of capping how much students can borrow. It's important to understand that it is just the latest move in what's been a decades long back and forth over how much to loan students. Caps on how much grad students could borrow from the government were first imposed back in the late sixties Then twenty years ago in two thousand six The Department of Education swung the other way and started offering unlimited loans, which lasted until Today And now, the Department of Ed is dismantling that unlimited loan program, and we're going back to caps These new caps are just shy of twenty one thousand dollars per year for most kinds of grad programs, for more expensive programs like medicine and law school. there is a higher cap This idea that caps on student borrowing could actually bring down the cost of tuition It's been around for a long time. Cory told me at the old coffee machine, I believe, that Linda McMahon's Department of Ed, they did not invent this theory this idea Where does the story of this idea begin? Penty of you should ask him begins On a february eighteenth. nineteen eighty seven I didn't expect a specific date. I will say. Okay go on stormy night I'm checking., actually, I don't know the weather on february eighteenth, nineteen eighty seven, but in what city New York Because here, let me look at it I will say Generally D drizzly and hazy in New York City. O on that day. Yes. Okay. On that date was published opinion piece by the New York Times written by Linda McMahon's equivalent, the education secretary under then President Ronald Reagan All right.. And this opinion, Ronald Reagan's, Linda McMahon. Yes, exactly. William Bennett, Bill Bennett And the opinion piece, the title says it all, he called it our greedy colloeges All right. Oh, okay. Do we have this ed Yeah, we do. Okay, let's here. let's pull this up and just see. Okay M of our colleges are at it again They have begun to unveil tuition increases that far outstrip the inflation rate next year Tuition is expected to rise six percent to eight percent He argued that Increases in federal student aid have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase Okay, we should pause there. So that's that's the whole argument. Yeah. And in fact, this idea really took hold, and economists dubbed it Bennet hypothesis, okay I will say this does not sound on its face preposterous to me. No No, I don't think it does either. Yeah where my brain goes immediately is We cover the federal Reserve They are responsible for keeping inflation at around two percent and When they are worried about prices increasing across the economy, what do they do? Well they make it harder to borrow money. And so I don't know. Is the DOE to some degree not sort of running? Metary policy for one product, essentially, which is college And so if they make it harder to borrow money, would that not be the way Inflation? Well, Kenny, I will leave the monetary policy to you. But I will say it sounds logical. And I think that's why the Bennett hypothesis persists to this day as a as a kind of popular idea question is Is it actually true When the Bennett hypothesis was hypothesized, it was exactly that, an untested assumption. Yeah, there was no real way to Test it until two thousand six Because that's when lawmakers decided to they kind of do the opposite of what Bennett was saying. They decided grad students needed more money, you know, not just for tuition, but for things like rent and food and books, a laptop while they pursued their degrees. So it was exactly twenty years ago today they enacted the Grad pllus looan program, which was the program that allowed unlimited borrowing for tuition pllus all that other stuff And that move Even though it was, again, likely the opposite of what Ben had in mind It allowed us to test Bennett hypothesis It provided exactly the kind of data that you would need to study whether easy access to unprecedented amounts of student loans would indeed result in Qote, colleges and universities blithely raising tuitions to sop up more and more of the money. whichich is why I ended up calling about half a dozen economists and higher education experts. Coreory had a simple question for all these experts Is that theory Or not? Well mean, what do we know for sure at this point about the Bennett hypothesis? poured over these studies by lots of different researchers over the past twenty years about How grad plus affected students I'm going to start with the study that everybody I talk to told me I needed to start with is most often cited by Republicans when they say, no, really, this will work. Okay. So this research was done in Texas And it was specifically focused on the creation of the grad plus program in two thousand six, where graduate school borrowers suddenly went from having loans to essentially being able to borrow as much money to cover tuition and fees as they needed What was the effect of that easy federal money? Well, Coreory got on Zoom and chatted with one of the authors of that study. His name is Jeff Denning. I'm an economist and a professor at the University of Texas at Austin. What Denning said was they specifically wanted to look at when borrowers were suddenly able to take out a lot more in loans from the federal government What effect did that have on colloegees prices in Texas. Did it increase the price that colleges were charging for their graduate programs? It's like the perfect natural experiment, if you want to test the Bennett hypothesis. Yeah. It is the perfect natural experiment. Denning and his colleagues ve poured through tons of administrative data graduate programs all over Texas And they looked at student level details like enrollment graduation rates, financial aid They found 's really interesting And the short answer is that we found that the price did go up Was it Was it like meaningfully Yes Like how would you characterize it meaneaningfully up, I would say a meaningful increase in the price Denning told me that for every additional dollar, students received overall in loans Graduate schools increase their prices by sixty four cents. twowo thirds of a dollar or something like that And Denning and his colleagues say that this is a causal relationship that their study found because the students could borrow more Many schools were indeed charging That's what that study found. So just in Texas, just in Texas Meingfully meaningfully is. Okay. so Bennett hypothesis truem Problem solved. Not so fast, Kenny. Yes, yes, I suspect there's more. So I also reached out to another researcher that lots of folks told me I need to talk to if I'm digging into the Bennett hypothesis. And his name is Robert Kelchin I'm a professor of higher education at the University of Tennessee Knoxville. So unlike Denning and his colleagues on the Texas stududy, Kelchin Rather than studying a state or an area, he focused in specifically on different fields of study. I did research looking at business, medical and law schools across the country. So what was the impact of limitless borrowing on traditionally pretty expensive graduate school programs and what he found? I did not find evidence. I did not find evidence of the Bennett hypothesis. Meaning no evidence that there's a direct connection between student loans and tuition prices. There's some evidence in favor particularly at for profit colleges. But he says, it's based on a kind of cynical understanding of graduate school Basically that the Bennett hypothesis is a logical conclusion if you're only looking certain types of schools. It's a logical conclusion if you think that these graduate programs are massive profit centers and some programs fields like business can be quite profitable O fields, for example, medical school is wildly unprofitable And Kelchin's point is there are a lot of graduate fields of study that aren't that profitable. because they are so expensive for the schools to offer. It can take a million dollars of resources to produce one medical degree So limiting borrowing is not going to reduce that cost. You know the labs, all of the different services they have to provide to students. And you can imagine the schools are operating on a relatively thin margin. Even if we assume that Institutions raised prices when loans became available. It doesn't mean that they have the space to move in the opposite direction Part of what Kelchin is saying is the reason these programs are expensive for students Is they're expensive for the schools So it's not so easy for them to prices. It's not that they're hugely inflated. I mean some are Not all of them We've got some serious mixed evidence about whether the Bennett hypothesis could work Nevertheless, this massive and sudden experiment is going forward. The day we are publishing this episode And so the people going to grad school this fall are already scrambling to make it work We've got more on what the research says about how they're most likely to react. afterfter the break This message comes from Capital O. Capital One offers checking accounts with no fees or minimums. What's in your wallet? Terms apply. See capital onene dot com slash bank guuy for details. 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Start therapy with betterter Hel Visit betterterhelp d. com slash nPR Okay, so mixed conclusions on whether and when the Bennett hypothesis is correct, meaning the evidence linking how much people can borrow to how much grad schools charge for tuition depends on lots of things Corey also talked to some other researchers about this new Trump administration plan, which restores the idea of loan caps from twenty years ago And actually, the loans end up being even more limited than before because they don't take twenty years of inflation into account. So we ask Coreory, like how do the people you talked to think this move is going to play out So I talk to Preston Cooper at the Conservative leaning American Enterprise Institute. So I think you know, going forward, it's important to remember that the new loan limits are still relatively high and that actually most students are already borrowing within the new loan These new loan caps are probably only going to affect about thirty percent of grad school borrowers, because the vast majority of folks, Cooper says, are right now borrowing within the new loan limits Oh that's interesting. Yeah. and his point is that the point of these new loan caps is basically to put downownward tuition pressure on some of the most expensive schools out there, including, by the way, some pretty elite name brand schools One analysis from the Per Center found that the two schools at the top of this list with the most affected borrowers NYU and USC. If students Don't go to that absurdly priced university and instead choose a more reasonably priced institution for the same basic degree path creates a lot of pressure on the high priced institutions to actually do something to lower their prices. He's put together some fascinating scatter plots that show, say, like a master's in social work all of the programs in the United States that offer a master's in social work. And you can see He maps where the new loan limits are vast majority of programs fall within the limits Then There are some quite well known and respected schools who for one reason or another, are charging two or three times as much. for the same degree. that you could get at a public university next door. So yes, I don't want to promise that in the first year where everybody's going to slash their costs and it's going to be great. But I do think that this is going to create some pressure over time, whether that's through students choosing cheaper institutions or through institutions realizing that they can't just raise the price every year and pass it along to students through the federal loan program This is going to create some real pressure for cost control in the medium run So in the next couple of years, the Bennard hypothesis Wood Mbe lower tuition. sometimes, someome places The experts I talked to pretty much agreed on that Robert Kelchin at the University of Tennessee He told me he expects to see at most a small decrease in tuition. Students may become a bit more price sensitive shop institutions a little bit more. And then Jeff Denning, who was one of the researchers on that Texas study, again that is most often used by Republicans to justify this move He told me posossible. We'll see price cuts. It's not out of the realm of possibilities that prices would reduce And a handful of schools have already said, in response to this new program They're going to lower their prices because they know students can't borrow as much. There will be less federal aid available The question is how will the private market respond How will students respond? You know, I don't have a crystal ball, I wish I did So no one has a true crystal ball as to how much, if at all These caps will bring down the price of grad school Corey, how do we think students will respond to this? Do we know that So Kenny, one of the folks I talk to is another friend of the show, friend of my beat, a regular Coreory Turner contributor. A regular Coreory Turner contributor. H name is Dominque Baker. She's an associate professor of Education and public policy at the University of Delaware And she told me that There's really robust evidence around what happens when you cut financial aid for students? And she said, one of the things that most often happens Is people just stop enrolling? When you cap financially aid like a student loan, but don't provide some commensurate type of grant or scholarship to help The number one thing that happens is that students stop going to college. And that is consistent across the research literature And Baker says though we're not sure That's likely going to be true for grad students too They're either going to leave school or turn to a private lender to try to get a loan And Robert Kelchin was also telling me, the students are scrambling right now to figure out how to pay for school this year Can they find money of their own? Can they go to the private market and find a loan Universities are trying to figure out how many students are willing to attend. If. They have to find money from a source other than the federal government So You've got lower income borrowers What are they going to do? I mean you could say, well, they'll go to the private student loan market, but the private student loan market is not what it used to be And that's because it used to be a key source of borrowing for students. Lots of people leaned on it, but when federal grad loans became unlimited twenty years ago There was this mass exodus out of private loans into the federal system. So there was a little reason for students to take out private loans And so Private industry shrank And now it could be way harder to get a private loan if you're a lower income borrower with you, let's just say a short credit history or maybe a suboptimal credit history, you might not be able to get a private Well, let me if I put my sort of ruthless economic theory hat on here U That is what it looks like when demand for a product right? It's fewer people enrolling means fewer people are asking for college degree or in this case a graduate degree And in theory, is that not the signal that is meant to be sent to these grad programs, you're too expensive. peopleeople are not going to enroll Yeah, I think there's some truth to that, Kenny. And I also think Uh, that's not a bad message to send to some of these schools. I think it's reasonable to tell those schools We're going to make this money harder to come byy for borrowers because we don't think you're giving them a good return on their investment And since they're borrowing taxpayer dollars, you know, the message to these schools is We're done We are not going lend unlimited money I guess the cruel thing about this particular message to send is that you must use peopleeople who want to degree. as the messenger Not that I have a better way to send the mess. Well, I don't yeah, I don't know if this metaphor is apt, but the way my brain keeps thinking of it is as a game of chicken. I feel like the Trump administration is playing chicken with schools The game of chicken is The administration saying get your prices down or else we're use Taxpayer backed loans toon't send people to your program, getet your prices down, or we're going to make it so that you have a hard time filling your enrollment The trick there is that it's really the borrowers who are the ones having to make those hard choices. Do anybody Better idea for I had a con grad schoolool class Sem No Yeah Yeah I mean, well, there one one proposal I've heard from folks is like make the lending program more supple you know, lend borrowers what is appropriate for their field of study Okay