The Bennett Hypothesis: From Stupid to Partly Right in Three Short Years

Law school (and perhaps a few other niche graduate and professional programs) is the exception that proves the rule: the Bennett hypothesis is false. In 2005 politicians were under pressure. Borrowing limits hadn't increased since the early 1990s, and, in some cases, since the 1980s. Colleges and lenders were asking for more. In some cases parents and students were joining them: the nonfederal private loan market was rapidly expanding at the time, and these loans did not offer the protections or the transparency of the federally-guaranteed loans. While some very minor increases in borrowing limits on existing loan types emerged from what had become a budget-cutting reconciliation vehicle, a new, open-ended loan type was cooked up apparently over Thanksgiving weekend 2006 by Congressional GOP staffers: Grad PLUS. While some thought this would be an ancillary product allowing parents to borrow for grad students and undergrad independent students, it was actually a product for graduate students themselves only. Like parent PLUS, the only annual borrowing limit was cost of attendance. There was no lifetime borrowing limit. When rolled out in 2006-07, an almost immediate jump in prices for law schools, foreign medical schools, and certain other types of schools showed up on the radar. Like parent PLUS, Grad PLUS loans enter repayment almost immediately, without the possibility of an "in-school deferment." Congress and the Bush Administration fixed this during 2008, making available an in-school deferment for parent PLUS for the first time in nearly two decades and applying that benefit to Grad PLUS as well. Even more amazingly, policymakers tacked on six months extra, as a faux "grace period." While interest accrues during all these periods, Grad PLUS was not only a safer product for students than private loans but private loans also were increasingly disappearing after the 2008 credit bust. This was "win-win," as the lack of interest subsidy and the ostensibly super high future earnings of Grad PLUS borrowers made the program a high-profit-margin product for the fed'l gov't. Getting rid of Grad PLUS, or at least trimming the frills, would take the wind out of sails of the increasing sticker prices of law school and several other graduate programs. It would cost the gov't money to get rid of Grad PLUS entirely but would make the point that policymakers are serious about controlling inflation. Sadly for fans of the Bennett hypothesis, there is little to no evidence that other types of student aid are inflationary. I'm sure it is not utmost in the minds of $60,000 colleges to see whether the maximum Pell Grant increases from $5550 to $5900, nor does this make much of a dent in affordability, never mind igniting inflation. Most types of Stafford loans are similar nonevents for college inflation.