Suze Orman focuses student loan debate on grad school loans

Bestselling author and personal finance adviser Suze Orman says she places high value on an individual's investment in an affordable college education.

But she takes extra time to emphasize the "affordable" distinction in that conviction.

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Orman is also quick to point out a major difference in two types of student loans with which people are making use. In particular, she says one of the two types is fraught with peril.

"If you follow my advice to restrict borrowing to only what a student can borrow from the federal government for an undergraduate degree, you will likely be able to pay off that debt in 10 years or so," Orman wrote on her blog. "That’s because the federal student loan program imposes relatively low borrowing maximums for undergrads that basically work as great financial guardrails."

Orman focused those comments on student loans for undergraduate degrees for a reason. It's the next level of education where she believes most people run into trouble.

"Unfortunately, the federal student loan program for graduate school has no borrowing guardrails," Orman wrote. "Graduate students are allowed to borrow up to the full cost of attending graduate school. And this is where I think a lot of young adults are digging a very large financial hole they will struggle to get out of."

The government is concerned about current trends

In fact, a U.S. Department of Education report released in August shows that the government has worries about this as well.

The report, "Trends in Federal Student Loans for Graduate School," noted that student loans for graduate school are increasing.

"From July 2021 to June 2022, the U.S. Department of Education disbursed $39 billion dollars in federal student loans to graduate students and $44 billion to undergraduate students and their parents," the report said. "At 47 percent, this set a high-water mark for the highest share of federal student loan disbursements going to graduate students in history, even though graduate borrowers accounted for only 21 percent of all borrowers."

The report also recognized that loans for graduate school are leading to high balances for borrowers.

"A closer look at borrowing trends and the outcomes of graduate programs, however, suggest cause for concern," the report continued. "Unlike undergraduate students, graduate students have been able to borrow up to the cost of attendance of their program of study since 2007."

"The change has led to increases in total borrowing among graduates, and large increases in the fraction of borrowers completing their studies with extremely high balances," it added, importantly.

The Department's report predicted that if these trends continue, graduate loans will soon comprise the majority of federal student loan disbursements.

Graduate degrees and career earnings

Orman also calls attention to another detail in the report regarding the expectation that a graduate degree will result in higher career earnings.

"The Department of Education report points out that the 'earnings premium' for various fields relative to a high school degree has not increased," she wrote. "For most fields, the percentage gain in extra earnings 15 years ago is the same today. That means that people who are borrowing more are likely not earning a lot more to cover their higher borrowing costs."

Orman makes an argument for attending colleges that don't cost an overwhelming amount of money.

"It is a myth that the extra earnings from an advanced degree will make it easy to pay off grad school debt," she wrote. "I am not telling anyone to not pursue a career that requires a graduate degree. But you will ultimately be so much happier if you choose a school that will not leave you with a massive amount of debt."

The personal finance adviser urged caution about making important education decisions.

"Please be careful in choosing to go to grad school, and which grad school you choose," Orman wrote. "A helpful rule of thumb that can help you make a smart choice is for the student to keep total borrowing (undergrad and grad combined) to no more than the expected first-year salary."

"Impose that guardrail and you will be in good shape to pay off your school debt within 10 years after graduating."

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