“College costs are simply exorbitant. Students are burdened with debt…” McMahon he told the House education committee in May. “We really have to do something to reduce the cost of college.”
With that goal in mind, Republicans used last year’s One Big Beautiful Bill to gut the program known as Grade PLUS and limit loans for graduates. The idea 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 do.
An idea from decades ago
The idea that there is a connection between federal student loans and what colleges charge dates back nearly four decades, to February 18, 1987.
That was the day then-Secretary of Education William Bennett, under President Ronald Reagan, wrote a scathing op-ed for The New York Timestitled “Our greedy universities.”
In it, Bennett criticized schools for tuition increases that outpaced inflation, arguing that increases in federal student aid “have allowed colleges and universities to happily raise their tuition, trusting that federal loan subsidies would help cushion the increase.”
His idea took hold and economists called it “The Bennett Hypothesis.”
“The Bennett hypothesis essentially says that if you provide more federal aid to schools, they will respond by raising the price,” says Phillip Levine, an economics professor at Wellesley College.
Nearly 40 years later, Republicans are dusting off the Bennett hypothesis to justify harsh limits on student debt.
Graduate School Is Driving Explosive Student Debt Growth
To be clear, the current limits on undergraduate The loans are not budgeted, and have not been in years. One reason: According to Levine, the net price of undergraduate programs (what families actually pay) has been pretty stagnant lately.
“We’ve seen at the university level for at least the last five years that college costs have actually been pretty flat,” says Preston Cooper, who studies higher education policy at the conservative American Enterprise Institute (AEI).
But the cost of graduate the school has increased considerably.
“We’re at a point where almost half of the debt right now is held by graduate students, even though they make up a much smaller proportion of the overall population,” says 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 1.
For two decades, Grad PLUS has served as a complement to the traditional loan program, allowing graduate students to effectively borrow everything they needed, without limits or barriers.
Cooper says it’s not a stretch to think that Grad PLUS helped drive an increase in graduate school costs.
“So far it has been a very easy answer [for schools] “Basically, raising revenue a little bit each year by simply increasing the cost of graduate school tuition because they know the federal government is going to have to give their students a loan to cover those additional costs.”
What the research shows
“I think having essentially unlimited lending is not 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 test Bennett’s hypothesis. They wanted to know if, in Texas, the suddenly unlimited supply of Grad PLUS loans that began in 2006 contributed to graduate programs raising their prices.
The short answer: yes.
He the researchers wrote that for every additional dollar students received in loans, graduate schools raised their prices by $0.64 (after accounting for grants they awarded).
Republicans often cite Denning’s work as justification for ending Grad PLUS, arguing: If schools increased their prices almost as much as federal aid increased, why wouldn’t the opposite be true? Less help should lead to lower prices.
But it’s not that simple, says Kelchen of the University of Tennessee, who has also researched the impact of Grad PLUS, specifically on business, medical and law schools.
“I found no evidence” of a direct connection between federal aid and prices, Kelchen says.
Even Denning, when asked if Bennett’s hypothesis is true, says “it depends. I think there is some evidence that this happens in certain circumstances, and there is 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 not profitable at all” for schools, Kelchen says. “Producing a medical degree may require a million dollars of resources. Therefore, limiting borrowing will not reduce that cost.”
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 attributable to a phenomenon known as “cost disease.” What’s that?
Well, over time, most companies tend to become more efficient, Levine says, which helps them contain costs while raising wages. But higher education doesn’t work that way.
“As wages rise elsewhere, universities must keep pace to attract workers who could work elsewhere. Ultimately, costs rise to produce exactly the same product.”
The half-dozen economists and higher education experts NPR spoke to agreed on one thing: Whatever its impact on prices, the Grad PLUS program, as a policy, was flawed.
“I think there was broad consensus that the idea of allowing graduate students to borrow basically infinite amounts of money was not a good idea,” says Sandy Baum, a senior fellow at the Urban Institute, a nonpartisan think tank.
But of Bennett’s hypothesis, Baum is skeptical: “There have been a lot of studies done on the causes of increases in college prices and on the effects of increases in student aid. And most of them find that in some cases…particularly at for-profit institutions, it’s true. But in most cases it’s not true.”
Instead, Baum, price increases have been driven by a number of factors, from “cost disease” and student loans, to rising insurance costs, technology and even the cost of living.
Will the end of Grad PLUS force colleges to reduce prices?
So what are we to make of the Republicans’ current argument that cutting student loans for graduate students will lead to lower prices?
AEI’s Cooper agrees with ending Grad PLUS, but doesn’t expect an immediate drop in prices.
“I don’t want to promise that in the first year, everyone is going to cut their costs and, you know, it’s going to be great,” Cooper says. “But I do think this is going to create some pressure. [on prices] over time.”
University of Tennessee’s Kelchen keeps his expectations low.
“I expect to see, at most, a small decline in tuition as students become a little more price-sensitive and shop a little more at institutions,” Kelchen says.
Wellesley’s Levine says drastic price cuts are unlikely: “Is it conceivable that it could contribute to some small change in graduate student prices? Maybe… Universities don’t just offset their prices. Universities have costs, and it has to be the case that the revenue they generate covers their costs.”
Even Denning, whose research found the clearest evidence of a connection between federal loans and college prices, says of these new loan limits potentially driving price cuts: “It’s certainly possible. I’m not sure if it will happen. I don’t have a crystal ball. I wish I did.”
Denning points out that it is difficult to predict student behavior. The dramatic cut in federal loans could cause students to opt for cheaper programs. It could also send them entering the private lending market. After all, he says, while the new loan limits are roughly the same as they were in 2006, before Grad PLUS, they are actually “much lower” because they don’t take into account two decades of inflation.
“We needed limits on lending,” says the Urban Institute’s Baum, “but these limits are extreme.”
As for the effect they could have on college prices, Baum predicts: “It’s not that prices are going to plummet. They could rise more slowly.”
And she worries that the caps will go into effect so suddenly that they could leave graduate school out of reach for some low-income students, a concern shared by Dominique 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,” Baker says, “and that is that students stop enrolling.” Especially low-income students who may not have the type of credit history necessary to qualify for a private student loan.
Recently analyzes suggest that these new limits will affect approximately 30% of graduated borrowers.
In her pre-testimony testimony, Secretary of Education McMahon repeatedly said that some graduate schools had already lowered their prices before the big change.
NPR followed up with the Department of Education for a list of those programs, some of which offer discounts through new scholarships. They include:
Borrowers are likely expecting this short list to get longer and faster.
