Post-Baccalaureate Federal Loans De-Subsidization: Impacts on Compositional Attributes, Extensive and Intensive Borrowing Margins, and Anticipatory Effects

The 2011 Budget Control Act eliminated the in-school interest subsidy for graduate and professional students borrowing under the Stafford Loan Program. As a result, starting on July 1, 2012, graduate and professional students borrowing Stafford Loans became responsible for the interest accruing during their in-school deferment period. This study assesses the effect of this de-subsidization on students’ compositional attributes (e.g. gender, ethnicity, income), borrowing behaviors (e.g. extensity or participation in and intensity or magnitude of borrowing), total annual amounts borrowed, sources of lenders, and anticipatory effects (i.e., changes in borrowing behaviors based on the knowledge of policy change before this policy was implemented). To address this goal, we relied on repeated cross-sectional data drawn from three iterations of the National Postsecondary Student Aid Study. We found evidence of compositional changes that signaled a reduction of white and an increase of first-generation in college for graduate students. We found no evidence of declines in student loan participation; however, we found anticipatory effects with about 45,000 (6%) graduate and professional students maxing out their allowed Stafford amounts before July 2012, a strategy that allowed graduate students continuing graduate school enrollment to be grandfathered this subsidy into the new policy era. Although debt burden increased by 3.86% post-policy, effect heterogeneity tests indicated that law students decreased their total debt amounts by 18.8%, with 83% of this reduction resulting from borrowing less from Stafford loans.