I recently heard a university professor make a reference to the “university industrial complex.” The Fed Reser. Bank of New York just issued a report “Credit Supply and the Rise in College Tuition: Evidence from the expansion in federal student aid program”. www.newyorkfed.org/research/staff_reports/sr733.htlm.
Thoughts?
In the book “Is College Worth It” by William Bennett, which had its play on CC a few yrs ago, he also makes the same assertion. I have to agree - if you had a business and you realized that you could keep raising prices and the government would just print more money to keep up with the increases, wouldn’t you keep raising prices in excess of the rate of inflation?? Without the government or the market to tamp down on the increasing prices, why wouldn’t you keep trying to get more and more? It is pure capitalism on the part of our higher educational system.
Of course it’s correct. The more we’re willing to pay, the more they’ll charge. The more credit available, the more we’re willing to pay.
Except me, because I’m cheap.
The discussion on Bennett’s book was before my tome on CC. Did he have hard data? What makes the NY Fed Reserve report interesting is that there is apparently good data underlying the analysis.
Thanks for posting. The discussion of institutional characteristics is also interesting:
“Institutions most sensitive to the loan policy changes are primarily private (93%), report average 2004 tuition of over $22,000 annually, enroll students with average 2004 EFCs of over $18,000, and admit 74% of applicants, on average. In contrast, low sensitivity institutions are predominantly public institutions (60%), charge lower average tuition ($10,825), enroll students with lower ability to pay (EFC = $9,124) and have slightly higher admittance rates (83%).”
I’m confused, where is this massive increase in government aid? Adjusted for inflation, Pell hasn’t changed that much since it started in the 70s. Direct loans have been the same for a while. Work study amounts have been consistent and go to the student anyway.
Another book that discusses this is Andrew Fergusen’s “Crazy U”. @romanigypsyeyes The number to watch is not the dollar amount of individual aid but the percentage of students who are getting aid vs. full pay. The less full pay students (by percentage) the more fictional the full pay rate is.
But full pay has nothing to do with federal aid.
I agree with @romanigypsyeyes in post #5. Gov’t pricing support hasn’t changed but prices have. Where is the link?
OK, so I’m not purporting myself to be an expert, only repeating what I read in the book. I went back and looked at some of the data - keep in mind the book was published in 2012, so the data is a tad dated but I suspect if someone were to go dredging the stats would continue. According to the book, from 1990-2010, costs at 4-yr colleges increased 150%, while Pell grants and federal tax benefits increased 242%, but federal loans increased 300% over that period. This would indicate that the feds were flooding the market with incentives to allow more kids to attend college, but there was no accountability to colleges placed by the government (who should’ve had market pricing power) to control or justify tuition hikes.
It would appear that although the amounts being offered individually haven’t changed much, they are giving them to more people. Like I said, the government is being more inclusive with its goodies.
Another interesting eye-opener from the book: In 1970, Pell Grants didn’t exist and the federal loan program had just started - 12% of college grads in 1970 came from households in the bottom quartile of income. in 2010, that number dropped to 7.3% - so it appears that the targeted recipients of these federally subsidized programs did not in fact benefit over 40 yrs of policy. Another example of unintended consequences…
Unintended consequences implies that this IS a consequence of the increased federal aid (which an “increase” in and of itself is questionable but we’ll ignore that for now).
Remember too that in the 70s and up through the early 90s really, people could often get good jobs without degrees. For example, 1 in 4 people in the early 70s had manufacturing jobs which overwhelmingly required a high school diploma or less. Now, less than 10% of people work in those jobs because they simply don’t exist in the US anymore. As those jobs declined, they were replaced by white collar jobs which required degrees.
From my own personal experience growing up in factory country, people went to college when their parents didn’t not because it suddenly became more affordable (because it didn’t) but because a college degree was the only way to get a job as the factories don’t exist anymore.
IMO, the whole federal aid caused increased prices is a bunch of hogwash. I could maybe accept that it had some small impact but considering the fact that prices have far surpassed the increase in aid and didn’t really start shooting up until well over a decade after programs were started and expanded, I don’t buy the causation argument.
Romani what you say certainly has merit and I’m sure that the increase in demand due to those demographic factors also contributed to increased tuition. However, I found some other stats in an article - in 2000, the government provided $43 billion in loans to 7.5 million students. In 2011, it provided $108.6 billion to 19.2 million students. That is an average increase in loan dollars of 14% per year over that period, almost 5x the pace of inflation during the same period. And I would also guess that these staggering numbers also outpaced tuition costs for the same period. If that money was simply not available (i.e., government only increased its student loan dollars at pace of inflation or some other smaller number), colleges would not be able to fill seats and would be forced to examine their business model because more people would simply not be able to pay.
I am not saying the federal spending is the only villain, there are other causes as well, but as an ex-economics major, the amount of money flooding the system from the government is impossible to ignore. Moreover, the NY Fed seems to agree, and they are always right 
Those numbers indicate that the amount per student stayed about the same.
Perhaps the much greater number of students taking student loans is a result of the rapidly rising price of college, as opposed to being a cause.
In the 70’s and 80’s, there was no where to get $20k if that’s how much school cost. Only rich people could go, or those who were super smart and received a scholarship. Now money is available to borrow through the government. A student can get a stafford loan, a pell grant, and SEOG grant, and if that is still not enough, the parents can take out a Plus loan. Still not enough? Private loans. Law and medical students can basically borrow as much as they want. There are students at the expensive colleges who are borrowing the entire amount. In the early 80’s, the Guaranteed Student Loan program was started and everyone but everyone borrowed the max of $5000 because the interest rate was so low - about 7%, sometimes 9%, which was still a better deal than a car loan at 15% or a mortgage loan at more than 13%. I know lots of student now who (or whose parents) take the Stafford loans ‘just in case’ or because it makes the college experience more pleasant. Could they take out less and work more? Sure, but why?
We all know it is not a good idea to go to a $60k/yr school if you are borrowing all the money, but thousands of kids/parents do it every year because the money is available. If it weren’t available, those students would have to pick another school. The school would then have to accept other students, maybe lower stat students, or lower the cost.
I set a limit on how much I wanted to pay for my kids per year. One picked a school that is close to the budget, but I okay’d going over because I knew we could borrow the extra if we needed it. If loans were absolutely not available, she’d have had to go to another school.
Didn’t read the article (I didn’t even open it) but I don’t think it’s any surprise to anyone that federal loans drive up the cost of college tuition. I didn’t realize anyone even disputed this fact.
Ok twoin, what do private loans have to do with federal aid?
Pell has stayed the same more or less when accounting for inflation since the beginning.
Direct loans cap out at 7500/student/year for upper division students. The price of many colleges has grown WELL beyond that.
Seriously where is this massive aid coming from that people are talking about that raised the cost of college from hundreds of dollars to tens of thousands over the course of two decades? (And for many, even less than that.)
This isn’t even bringing in the fact that only about half of students at 4 year colleges even receive Direct loans and only ~40% receive grants.
There are many, many factors that I think have a much bigger impact on the cost of college for the average person and college. Rapidly declining state aid is one of them. For public 4 years, the percent of federal aid that comprises their budget has stayed relatively stable since the early 2000s while state aid has shrunk from nearly 1/3 of their budget to less than 1/4. That has been made up for by an increase in tuition revenue.
I was focused on federal programs, but the increased availability of private loans also contributed. When prices of an item are going up way beyond inflation and more money is thrown at it from whatever sources without applying market forces to do anything about pricing, there is no incentive for colleges to not increase costs beyond inflation. There needs to be a capital drought for college money before colleges do anything about better controlling their expenses and operating more like businesses on the expense side (they sure have figured out how to charge for things on the revenue side).
Do you think that housing booms like the one that busted in 2007 had anything to do with the intrinsic value of homes? Or even simple demand for homes (like people just needed places to live)? It had to do with the flood of easy capital provided by banks to people at low cost, so that the demand was created. Why not trade up to a 4,000 sf home with a pool, if I can do so for the same monthly payment??? Cheap capital fed sales, sales reduced supply and increased demand and the prices skyrocketed towards the bubble and crash. Same thing is continuing now with the super low interest rates we’ve had since the recession, albeit with slightly more stringent underwriting and less fraud by financial institutions. However, when rates start to rise, housing demand will decrease, and prices will stabilize or fall, depending on the region and how fast rates rise. Same thing would be true of college costs if anyone had the guts to hit the brakes.
And BTW, it doesn’t matter how you get there - whether it’s providing more $$ per student or just providing the same $$ to more students, the fact remains that the higher education market is flooded with more capital - total dollars are growing at roughly the same rate as tuition. This market force alone allows the universities to continue raising prices because the money is there to match the increases.
Shocking! Shocking! The feds have discovered when you increase the demand for college services by increasing the college money supply the price rises! Only one solution possible! More loans to students ! We’ll call it … the Affordable College Act!
You’re right that federal grant aid hasn’t increased that much over the years, but you’re forgetting about Parent PLUS loan (you can borrow up to the cost of attendance – no matter what it is) as well as the other supports that the government provides either to private student loan lenders (such as the bankruptcy protection which encourages lenders) as well as other programs like the 529 tax-advantaged savings plan.
I don’t have a big problem with these programs existing for the most part but it’s fairly obvious that making it easier for people to pay for college (either by lending them the money, making it easier/cheaper for them to save the money, or making it easier/safer for others to lend them the money) helps facilitate the rise in college costs. There are other factors that go into it though - the state aid shrinking is a big deal, as well as the different new programs that colleges are implementing (you have huge new capital projects and a lot of administrative and compliance overhead to satisfy parents, students, US News rankings, and legal requirements).
It’s a pretty complex area of economy and anyone who says that there’s exactly one reason is probably selling snake oil though.