Student Loans

The Real Student Loan Crisis Isn't From Undergraduate Degrees

Misled by a bad law, graduate students are drowning in debt.


More than anything, Heather Lowe didn't want her children to grow up in poverty.

The 27-year-old had already had more interactions with social services than most ever will. As a child, she had been in and out of foster care and witnessed her parents' struggle with drug addiction. She had her first child at 19. She soon found herself bouncing between homeless shelters with her infant son. She even did a stint at a domestic violence shelter.

"I needed to do better for my kids. I needed to do better even for myself," she says. "A lot of people were very much like, 'All you'll ever be is a single parent. And you'll be an uneducated person for the rest of your life.'"

When her son was 2 years old, she went back to school, finishing several associate degrees and then completing a bachelor's in psychology from California Lutheran University. But even then she struggled to find work that paid enough.

"I got offered $15 an hour with a bachelor's and four associates," Lowe says. "So I was like, 'Well, I have to get my master's, and I'll be a therapist.'"

Lowe soon settled on entering a Master of Social Work (MSW) program. She scoured the internet for MSW programs, best MSW programs, affordable MSW programs.One school kept popping up: USC.

The University of Southern California's Suzanne Dworak-Peck School of Social Work is the largest social work school in the world. In 2016, university officials estimated that as many as 1 in 20 graduate-level social workers in the nation were educated there.

Soon Lowe found herself on the phone with a USC representative, who she says aggressively sold her on the school's MSW program.

"There was like a sense of belonging when they talked to you," Lowe recalls. "It was very much like, 'Don't even worry about the other programs. We know that we're the most affordable, and we know that we will give you the best education.'"

Lowe had been thinking about abandoning her plan to enroll in a master's program because of the hefty price tag, but USC wouldn't budge. "They kept calling me. And they kept telling me, 'Your story matters. You should work with kids that suffered the way you suffered.'"

Lowe says she was accepted to the program without even filling out a formal application. She enrolled in USC and graduated in 2023 with her master's degree—and over $90,000 in student loan debt.

The Crisis That Isn't

From Sens. Bernie Sanders (I–Vt.) to Tommy Tuberville (R–Ala.), politicians across the political spectrum insist the cost of college plunges scores of bright young people into decades of crippling debt.

The real story is more complicated. It's true that yearly increases in college tuition have long outstripped inflation, rising more than 200 percent since 1980. But the conversation around student loan debt has become seriously miscalibrated: Not only do small, expensive, elite universities command the conversation about tuition costs, but there's a misplaced focus on undergraduate degree programs.

Even after decades of tuition hikes, it is still a good time to be a motivated first-time undergraduate student. The average public university tuition bill is less than $10,000 per year, and the most selective universities tend to offer extremely generous financial aid. Despite tuition increases, most undergraduates don't pay full price. In 2020, around half of students at four-year public colleges received federal grants and about half received institutional grants. At private nonprofit colleges, 84 percent received institutional grants; only about 40 percent received federal student loans. The Association of Public and Land-Grant Universities, a membership association of public research universities, estimates that at four-year public colleges, 78 percent of undergraduate students graduate with less than $30,000 in debt and 42 percent graduate with no debt at all.

Over half of federal student loan borrowers owe less than $20,000, but the political narrative doesn't reflect this. One popular proposal would entail forgiving $50,000 of federal debt per borrower—a plan framed as necessary to help the typical struggling young person.

When students do take on undergraduate debt, it's usually a worthwhile investment when compared to never getting a college degree. Lifetime earnings for typical college graduates are far higher than for those with only high school degrees.

There are real problems with America's student loan system. But they mostly involve people who take on debt to pay for expensive graduate degrees.

Those problems are rooted in a little-known 2005 law that eliminated a cap on the amount of federal student loan debt that graduate students were allowed to take on. In the following decade and a half, the amount students borrowed for graduate school climbed.

Students weren't just borrowing to pay for high-quality graduate programs. Some of the graduate programs that saw students take on the largest debt burdens were those that provided the least value in terms of quality instruction or earnings.

Graduate students, in other words, weren't just taking on more debt. They were taking on more debt for less lucrative degrees, offered by programs eager to absorb federal loan dollars. Even as undergraduate degrees largely held their value, a bevy of newly subsidized graduate degrees have lured students into expensive programs of dubious quality.

A Boon for 'Expensive but Questionable' Degrees

This rapid rise in debt began after the 2005 Higher Education Reconciliation Act introduced a new offering called Graduate PLUS loans.

Following the 1992 Higher Education Amendments, most individuals could borrow no more than $18,500 a year from the federal government to pay for a graduate degree. Now, graduate students could borrow up to the total cost of attendance for their program, including living expenses.

Unsurprisingly, graduate student borrowing skyrocketed. While the inflation-adjusted amount owed by graduate borrowers rose just 7.8 percent from the 1999–2000 school year to the 2003–2004 school year (Education Department data are not available for every academic year), it rose 27 percent from 2007–2008 to 2011–2012.

Some of this rise can surely be attributed to increases in borrowing for living expenses. But graduate programs also hiked costs after the introduction of the Graduate PLUS program.

From the 2004–2005 school year to the 2014–2015 school year, average tuition and fees increased roughly the same when comparing all undergraduate and graduate programs. But that doesn't account for the inflation of undergraduate sticker prices—while schools began listing higher tuition and fees, they often offset this cost with increased scholarships and need-based financial aid. From the 2009–2010 school year (data isn't available for earlier years) to the 2020–2021 school year, inflation-adjusted net prices at American four-year colleges actually decreased slightly.

In contrast, most schools don't offer much financial aid to graduate students, outside of funded Ph.D. programs. Also, Pell Grants are generally not available to graduate students, leaving student loans as the main option to pay for school.

Universities across America have increased their graduate enrollment to capture more of this federal funding. From the 2006–2007 academic year to the 2021–2022 academic year, the number of master's degrees conferred has increased by over 50 percent.

While there are big financial benefits to obtaining a bachelor's degree, the benefits of getting a master's degree are much smaller—and are inconsistent across disciplines.

"The federal government allows graduate students to borrow unlimited amounts while imposing few controls on the quality of the programs financed. The result has been a proliferation of expensive but questionable graduate programs," wrote researchers Jason Delisle and Preston Cooper in a 2021 National Affairs article, adding that ample loan forgiveness programs, like income-driven repayment and Public Service Loan Forgiveness, "remove any market discipline that might normally correct this problem."

According to a 2023 working paper from the National Bureau of Economic Research, authored by economists from Columbia University, Vanderbilt University, and Brigham Young University, the 2007–2010 academic years following the introduction of Graduate PLUS loans saw graduate school net prices increase an average of 64 cents per $1 of increased student borrowing when compared to the 2002–2006 academic years.

This increased loan availability didn't lead to better outcomes: Graduation rates didn't improve after the advent of the program.

Meanwhile, the inflation-adjusted cap on aggregate borrowing for dependent undergraduates has actually declined slightly since 2006. While undergraduate students can (and often do) obtain private loans, or have their parents take on unsubsidized federal loans through the unlimited Parent PLUS program, this cap has kept net undergraduate prices from spiraling out of control the way they have for many graduate programs.

Increases in the availability of student loans are not the only factor causing rising tuition for both graduate and undergraduate degrees. Government spending on financial aid programs (such as Pell Grants) and increased collegiate spending on administrative roles have no doubt played a role. So, too, has the aforementioned trend toward increasing sticker prices while providing students more with aid and scholarshipswhich has distorted the popular conception of how much undergraduate degrees actually cost. But while multiple factors contribute to tuition increases, there's little doubt that the introduction of Graduate PLUS loans created an incentive for students to borrow more and for schools to hike prices.

Before the program's introduction, "if you wanted to go to graduate school, you'd have to either pay out of pocket, find an inexpensive graduate program, or you'd have to go to a bank," says Adam Looney, an economist at the Brookings Institution and the University of Utah. "So grad students didn't borrow very much. Today it's just enormous amounts."

'That's What I Was Making as a Manager at Yogurtland'

From 2006 to 2021, USC increased tuition for its social work program from around $35,000 for the first year to almost $60,000. Even adjusting for inflation, it was an increase of over 25 percent.

In 2010, the program introduced an online option, which sparked a huge increase in enrollment. Six years after the program was introduced, MSW enrollment had nearly quadrupled, rising from around 900 in 2010 to 3,500 in 2016.

While online students pay just as much as their in-person counterparts, a recently filed class-action lawsuit argues that the two programs have major differences. The suit claims that USC employs an entirely different cohort of faculty to teach online MSW classes and that online students receive a substantial portion of instruction in the form of prerecorded lectures. The school also outsourced academic support staffing to 2U, a Maryland-based education tech company—the same company responsible for the online program's aggressive recruiters.

Lowe was one of those online students. Just a 40-minute drive from the university, she earned her degree sitting behind a screen in her public housing apartment, trying to pay attention while pregnant with her second child and taking care of her son and her teenage brother.

Lowe says USC administrators pressured her into enrolling in the online program. "I should have done it in person," Lowe says. "But they're like, 'Nope, online is just as good. So why travel? And why waste the gas?'"

Once she logged on, Lowe became concerned she wasn't receiving an adequate education. She says her teachers showed students decades-old videos and often didn't know how to operate the platform used to conduct online classes, leading to frequent delays.

After being assured she'd be eligible for a bevy of scholarships, Lowe quickly realized it would be nearly impossible for her to secure enough funding to avoid tremendous debt.

As the financial burden of her education became clear, she considered dropping out. But when USC administrators told her she might have to start her degree from scratch at the other schools she was considering, she ultimately decided to pull through and complete the program, taking out over $90,000 in student loans through the Graduate PLUS program.

After briefly struggling to find a job after graduation, Lowe eventually landed a position as a public school social worker. She's making just $25 an hour. "That's what I was making as a manager at Yogurtland," she says.

'It's Not Really a Loan Anymore'

This unsung crisis is about to get much worse.

In August 2022, the White House announced the federal government would forgive up to $20,000 in federal student loan debt per borrower—a whopping sum estimated to cost over $500 billion over the next decade. From the start, the proposal seemed doomed to fail. It was based on a dubious reading of the HEROES Act, a 9/11-era law designed to let the government halt or forgive student loan payments during wartime or another "national emergency." President Joe Biden insisted the COVID-19 pandemic qualified, an argument he undercut just days later by announcing the pandemic was "over." The measure was quickly halted in federal court, and the Supreme Court eventually struck it down in a 6–3 decision.

But that ruling didn't affect a policy that may end up causing more long-term damage than any one-time loan forgiveness.

The income-driven repayment (IDR) plan is one of the most popular ways borrowers try to lower the financial burden of their loans. While there have been several IDR plans, the most popular, the REPAYE plan, requires borrowers to make monthly payments over a set period of time—typically 20 years—with payment fixed to a set percentage of the borrower's discretionary income.

At the same time Biden announced his loan forgiveness scheme, he announced sweeping changes to IDR rules. The REPAYE plan would be replaced by a new plan, called SAVE. This new plan is much more generous than the old IDR.

The REPAYE plan required borrowers to make monthly payments of 10 percent of their discretionary income (calculated as earnings above 150 percent of the federal poverty line) for 20 years for undergraduate students, 25 years for graduate borrowers. Under the SAVE plan, borrowers have to pay only 5 percent of their discretionary income (now considered earnings above 225 percent of the federal poverty line) and have to make payments for only 10 years for balances less than $12,000. Incomplete or late payments count toward the required payment period, and the government will pay for interest if a borrower's monthly payments are too low to cover it.

This revised system is estimated to cost $475 billion over the next decade—nearly as much as the $519 billion predicted price tag of one-time forgiveness alone. Plus, the SAVE plan could very well be the status quo for much longer than a single decade.

"The system has gotten so generous that it's not really a loan anymore," says Preston Cooper, a senior fellow at The Foundation for Research on Equal Opportunity. "It's more like a grant. And I think at that point, you'll start to see colleges saying, 'Hey, students aren't going to have to pay back their loans in full. So why don't we raise our prices, have students take out more loans, and the loans will just get forgiven by taxpayers?'"

The Way Forward

The federal student loan system does not have to be so dysfunctional—or so big. In the wake of Biden's failed student loan forgiveness proposal, there have been some efforts to prune back the program.

In June, Senate Republicans unveiled a package of five bills that aimed to reshape student loan policy. The first three are unremarkable reforms aimed at mandating more transparency from the government and universities—requiring that prospective borrowers are informed how much they can expect to pay per month toward their student loans and how much they are likely to make upon graduation from a specific program.

But the fourth and fifth bills would enact major changes to the student borrowing regime. The fourth bill would eliminate most repayment options, leaving a standard 10-year repayment plan and creating an IDR plan that resembles the old REPAYE plan. The fifth bill would eliminate the Graduate PLUS loan program entirely. Graduate students could still access federal student loans, but they'd have a cap of $20,500 in unsubsidized loans per year.

The fourth bill would also cut off loans to programs that don't leave students better off. Bachelor's and associate degree programs whose graduates earn less than the median high school graduate, and graduate programs whose graduates earn less than the median bachelor's degree holder, wouldn't be eligible for federal student loans.

House Republicans also unveiled their own bill, which would make the terms of IDR plans much less generous and provide "targeted" debt relief for some borrowers.

It's unlikely that either the Senate or House plan will have the votes to pass, let alone to survive a Biden veto. In 2022, over half of Democratic voters were college-educated. Democratic politicians understand that promising a significant portion of their base a massive financial windfall gets votes, even if that windfall would essentially entail a wealth transfer from a lower-income group to a richer one.

Many people wind up in a bad situation after getting a degree they didn't need at a school they shouldn't have picked and couldn't afford. They may deserve sympathy, but allowing student loans to be discharged in bankruptcy is a fairer policy than consequences-free debt forgiveness.

Even some borrowers themselves recognize this. A 2023 survey found that 17 percent of respondents with student loans opposed Biden's original loan forgiveness plan, and 43 percent were opposed to forgiving all student loan debt.

'We Want To Enroll as Many Students as Possible'

It's easy to look at these incentives to get expensive, borderline-useless graduate degrees and conclude that our entire higher education system is irrevocably broken, but it's surprisingly easy to finance an undergraduate education.

For the 2021–2022 school year, the average tuition and fees at a public, four-year institution was just $9,596. The cost can be brought down even further with two years at a local community college, which averages just over $3,500 per year.

This investment tends to pay off. In 2021, the median earnings of someone with an undergraduate degree were 55 percent higher than the median earnings of those who only graduated high school. Over the course of his lifetime, a man with a bachelor's degree can expect to earn $900,000 more than a man with only a high school education; women can expect to earn $630,000 more than their uncredentialed counterparts.

Thus, getting a degree is a great idea. But there's a catch.

Those with some college education and no degree don't experience a salary bump. In fact, their earnings are virtually identical to those with just a high school diploma. The difference is that college dropouts also have college debt—on average, about $14,000.

The lesson is simple: You should go to college, but only if you are fairly certain that you have the academic chops to finish.

Unfortunately, huge numbers of students don't follow this advice. According to the National Center for Education Statistics, the average six-year graduation rate at American colleges was just 64 percent in 2020, meaning that 36 percent of students took even longer to finish school or didn't graduate at all. This shouldn't be surprising. In 2021, 75 percent of high school students who took the ACT exam scored so low they failed to meet minimal college readiness benchmarks in English, math, reading, and science. But in 2021, 43 percent of high school seniors immediately enrolled in a four-year college upon graduation.

Most colleges in America accept the majority of their applicants—including those whose academic profiles indicate a high likelihood of dropping out. According to a Pew Research Center analysis of over 1,300 colleges and universities, 53 percent accepted more than two-thirds of applicants.

Universities' "incentive is to say, 'Hey, the federal government is offering all of this federal student loan and grant funding. We want to enroll as many students as possible, even if we know that they're not in a position to finish college,'" Cooper says. "'And if they drop out, you know, we're no worse off because we face no financial consequences if we fail students.'"

Despite the flaws of the undergraduate status quo, earning a bachelor's degree remains the wisest choice for motivated students—even with the debt that frequently follows. The same can't be said for many graduate degree programs.

'It's Not Worth $97,000 To Look At'

In 2021, USC quietly overhauled its MSW program.

For years, the school's online component had been a financial liability. Despite the high tuition, USC had entered a contract forfeiting 60 percent of tuition dollars for the online program to 2U. Getting high enough enrollment to make the program profitable required USC to lower its admissions standards, a move that tarnished the once-prestigious program's reputation. The school said it would improve its standards for prospective students and reduce the number of credits required to graduate, effectively cutting tuition by 25 percent.

Lowe had finished a year of the program when the changes were introduced. While she was able to graduate with reduced credit requirements, lowering her costs in her second year, she also felt that taking fewer classes further widened her educational gaps. Even with the reduced costs, the program was still incredibly expensive—and still left Lowe and many other graduates feeling cheated out of an education.

"It's good to look at," Lowe says of her degree. "But it's not worth $97,000 to look at."

If the government had not subsidized virtually unrestrained graduate borrowing, it's unlikely USC would have been able to justify such an expensive program in the first place. At the very least, students unable to pay out of pocket would have had a strong incentive to look elsewhere.

An online social work degree from USC simply isn't worth what the university was charging. Even with the Graduate PLUS program in place, USC finally felt compelled to lower its prices—after the threat of financial and reputational ruin became too much to bear.

But USC's social work school is just one program at one university. Hundreds more graduate programs are still taking virtually bottomless government funding while providing little utility for the students who borrow to attend them.

"I wish I wasn't so eager," Lowe says. "I feel like if they gave me my money back, I'd be OK with giving them back my degree."