The central problem for many students is the accumulated student loan debt. It has been estimated that for the current population graduating in 2010, the average debt will be $33,000, with an annual average rate of repayment at 8% of income. A recent study by the Project on Student Debt estimates that the average debt is now over $30,000, with an annual average rate of repayment of 8.75% of income. These figures are a fraction of the student debt for many graduate students as the average debt of the PhD recipients who appeared in the 2010 NBER’s working paper, Student Debt and Future Earnings, is $57,000.2
Students with loans are much less likely to have a high income than other graduates, and they are less likely to have a low income than some other graduate degree holders. This has led to a growing concern about the consequences of the explosion in student debt. The Federal Reserve Bank of New York’s Research Affordability in the Social Sciences (RAISES) is an important program intended to help ensure that student debt does not harm a graduate’s ability to enter and compete in the labor market. In light of the large increase in student loan debt over the last few years, however, it seems imperative that research scholars who graduate with large student debts should receive some help with their expenses and that the program be able to compensate them adequately. One option for compensating graduate students would be to help them with loans through the Federal Reserve System. According to an estimate published in June 2013 by RAGER, $60 billion was disbursed in loans for graduate students in the 2006-2008 academic year, and another $50 billion has been disbursed since then. Thus, the Federal Reserve has approximately $70 billion to disburse each year in loans to graduate students. The proposal that we submit is meant to supplement the amount of money that the Federal Reserve can disburse to graduate students, while still keeping the program affordable to the Federal Reserve’s borrowers and beneficiaries. We believe that the Federal Reserve’s direct lending program for graduate students needs to be streamlined, simplified, and cost effective so that those who most need help, can get it.
It is hard to exaggerate the complexity of the federal graduate student loans system. The U.S. Department of Education publishes data on undergraduate and graduate debt owed by individuals and includes estimates of federal loans outstanding. Federal data on loan defaults also indicate the cost of student loans outstanding. Additionally, there are estimates on what percentage of graduates default on their loans. This is known as the cost of default. Federal estimates suggest that the cost of default is in the range of 0.060.25% of the loan balance, but some state- and college-specific estimates suggest higher defaults. Finally, there is the issue of income in determining eligibility for Federal loans. Federal loans are available only to low-income borrowers, typically through income-based repayment. The Direct Loan program is designed to provide loans to eligible borrowers. The Department of Education (DOE) calculates a “pay gap” by considering factors like the borrower’s total debt and the amount of income to be expected from that debt. These factors will vary from one loan to another, making the “pay gap” more or less likely. At the same time, this gap is an estimate and not the exact value of income. It is estimated that the median income of borrowers applying for a loan is $32,700, making a 25% gap in their income. At the same