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Higher Education Watch
Study: Federal Loans Driving College Tuition Hikes

In 1987, William J. Bennett, then former President Ronald Reagan’s Secretary of Education, controversially speculated that federal student loan subsidies were helping to drive college tuition increases. “Increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase,” he wrote in the New York Times. “Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.”

A recent study by Grey Gordon of Indiana University and Aaron Hedlund University of Missouri provides support for what is now known as the Bennett hypothesis. (Thanks to Mark Calabria for the pointer). The economists constructed a sophisticated model of the higher education market “to test explanations for the steep rise in college tuition between 1987 and 2010.” Their result: Changes in federal student loan programs “account for the lion’s share of the higher tuition.” The model actually found that federal subsidies can explain all of the increase in tuition, but the authors caution that their estimate likely represents “an upper bound.”

Moreover, according to the study, changes in federal loan programs have raised tuition so much that they have reduced the overall number of people who could get a college education: “The tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline from 33% to 27% in the new equilibrium with only demand shocks”

Of course, this alone is just one study. But the bottom line, as our friend Instapundit has said, is that “when you subsidize something, the price goes up.” Ballooning federal loan programs, in addition to saddling students with debts that they increasingly can’t afford to pay back, may also be making college less affordable. This doesn’t mean that subsidized student loan programs should be scrapped entirely—it’s important that our society find ways to help students access the kind of education that will best help them succeed—but it does mean that they should be implemented more intelligently.

College tuition has been rising faster than inflation—indeed, as the authors point out, faster than health care costs—for over a generation. The way to fix this is not (as many politicians are proposing) to simply throw more money at the colleges in the form of increased financial aid subsidies. It’s to break the federal monopoly on higher ed accreditation, cut regulatory costs, and, most importantly, experiment with new and innovative ways to deliver higher education at lower cost.

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  • Anthony

    Commonsensibly, I am sure no one would dispute former Secretary Bennett’s assertion made in 1987 prior to study. But, an equally compelling speculation in my view is question where does the money from increase tuition rates go. A look at where the money goes would certainly add more perspective – percentages for: administration/staff, long-term debt funding, interest payments, property-plant-equipment costs, and, of course, instruction. Federal subsidy may very well induce the higher education bubble but a closer look at where the money ends may be equally as exasperating aside from accreditation, regulatory, and new delivery concerns.

  • jeburke

    Of course, the simple test of this hypothesis would be to eliminate all student loans. Is there a shados of a doubt that competitive colleges would reduce tuitions accordingly and then move to make sharp economies such as cutting bloated administrative staffs, requiring tenured profs to teach more classes, eliminating silly programs, trimming frills like fancy meals and “student life” centers, instead of reducing the size of the student body. Meanwhile, the least competitive institutions would fold (because they mostly came into existence or expanded like crazy in the 70s and 80s due to the availability of lots of loans).

  • lord acton

    As Herb Steyn said, what can’t go on forever won’t go on forever. The huge disparity between what higher education costs and the value that it delivers has peaked. The same is true of health care. I expect the value of both to improve from here out, which is not to say they won’t remain overpriced for a very long time to come.

  • f1b0nacc1

    Why are we obsessed with the notion of ‘delivering’ higher education? Do we really believe that higher education (as separate from simply credentials) is really necessary for most people? Perhaps it is desirable (and I would be sympathetic to such arguments), but spending trillions of dollars in order to provide post-adolescents with several years of vacation and poorly staffed theme resorts strikes me as both wasteful and counterproductive.

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