Grad-School Loan Binge Fans Debt Worries

Graduate students account for 40% of borrowing; many seek federal forgiveness.

Virginia Murphy borrowed a small fortune to attend law school and pursue her dream of becoming a public defender. Now the Florida resident is among an expanding breed of American borrower: those who owe at least $100,000 in student debt but have no expectation of paying it back.

Ms. Murphy pays just $330 a month—less than the interest on her $256,000 balance—under a federal income-based repayment program that has become one of the nation’s fastest-growing entitlements. She plans to use another federal program to have her balance forgiven in about seven years, a sum set to swell by then to $300,000.

The promise of forgiveness is “the only reason I would have ever considered” amassing so much debt to attend Tulane University Law School, says Ms. Murphy, 45 years old. She earns $56,500 a year as an assistant public defender in West Palm Beach.

The doubling of student debt since the recession, to $1.19 trillion, has stoked a national discussion over how to rein in college costs and debt and is becoming a major issue in the 2016 presidential race. Little noted in the outcry is the disproportionate role played by postgraduate borrowers, who now account for roughly 40% of all student debt but represent just 14% of students in higher education.

Propelling the surge in grad-school debt is a welter of federal programs that make it easy for students to borrow large amounts, then to have substantial chunks of those debts eventually forgiven. Critics of the system say it makes it easier for graduate schools to raise tuition, and for some high-earning graduates such as doctors to escape debts they can afford to repay.

“What we’re doing is randomly subsidizing lots of people without careful thought,” says Sandy Baum of the Urban Institute think tank, who has advised Hillary Clinton’s campaign. “That’s just really problematic.”

The Obama administration defends the loose credit policy, pointing out that grad students generally are good credit risks because they typically become society’s wealthiest earners, and that income-based repayment is designed as a safety net during tough times.

“The Obama administration is committed to keeping a higher education within reach for all Americans,” says Denise Horn, a Department of Education spokeswoman.

The federal student-loan programs are designed to generate revenue for taxpayers, and they do. But surging enrollment in the debt-forgiveness programs recently prompted the government to increase by $22 billion its estimate of the long-term costs of the provisions. And a recent move to expand the most generous repayment program to millions more borrowers will cost an estimated $15.3 billion.

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