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Subsidized Loans Are Inflating Cost of College

Friday July 10th, 2015   •   Posted by Craig Eyermann at 1:02pm PDT   •  

college_20money Three researchers at the New York branch of the Federal Reserve, David O. Lucca, Taylor Nadauld and Karen Shen, have just published the results of their study into whether federal government-backed or -issued student loans and other forms of government assistance are contributing to the rise in college tuition. Here’s their key finding, as described in the abstract of their report:

We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65 percent.

What that means is that for every $3 increase in government-subsidized student loans, U.S. colleges and universities are able to increase their tuitions by $2. That kind of dynamic and greed on the part of university administrators goes a very long way toward explaining why the cost of a college education has skyrocketed in recent decades.

Meanwhile, they also found that when the government provides financial assistance for students by directly giving them money through Pell Grants, for example, every dollar increase in that kind of aid would appear to prompt U.S. higher-education institutions to increase their tuition by 55 cents.

Of the two forms of government education assistance, the authors suggest that grants, on net, are more beneficial for students because they cause tuition to rise by a lower amount and because they never have to be paid back. But the same is not true for government-subsidized student loans:

From a welfare perspective, these estimates suggest that, while one would expect a student aid expansion to benefit its recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect.

In other words, because this form of government subsidy contributes to larger increases in college tuition bills, government-subsidized student loans actually reduce the rate of return that borrowing students earn on their investment in their higher education to near-zero levels. Yes, subsidy-inflated tuition bills inflate the size of student-loan payments that much.

And that’s not even considering the fact that the U.S. government borrows money to issue money-losing subsidized student loans. That borrowing means that many of the same students, who aren’t even benefiting economically from going to college, will have to pay higher taxes to compensate for the cost of running up the national debt, because they borrowed from Uncle Sam to go to college.

There’s a saying that applies here: “If you thought you were poor during college, just wait until you have to pay your student loans back.” It’s a bigger bill than just the sum of all the student loan payments!

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July 2015