A Perverse Incentive for Graduate School
By David Henderson
On a flight from Rochester, New York to Washington Dulles last Friday, I sat beside a young woman who had recently graduated from Penn State and had just started a new job. We got talking about student debt. She told me that her debt from being an undergrad was about $48,000 and that that was unusually low because she had paid reduced tuition due to her mom’s being a Penn State employee. Many of her friends, she told me, had debt in the six figures.
I asked her what they were doing to pay it if they, as she had said earlier, some had not yet found jobs. She said many of them were contemplating going to graduate school even though not all were enthused about doing so.
So let’s get this straight: They’re in a lot of debt and their solution is to go into more debt by going to graduate school. This didn’t make sense to me.
But then she explained. If you go to graduate school, the government will pick up the tab for the interest owed on your undergraduate loans. Think about some plausible numbers. The debt is $100,000. The interest rate is 6%. Annual interest: $6,000. So you save $500 a month (after-tax, mind you) by going to graduate school. That’s a strong marginal incentive. And we taxpayers pick up the tab.