More Student Loans Leads To Higher Tuition: NY Fed Study

More Student Loans Leads To Higher Tuition: NY Fed Study

A July 2015 Staff Report from the Federal Reserve Bank of New York argues that the dramatic increase in access to and issuing of student loans over the last decade and change is directly responsible for a significant percentage of the huge tuition increases seen at U.S. colleges and universities over the same period.

Chief Economist Lindsey M. Piegza of Stifel highlights the problematic dynamic in an August 27th report, noting: “While tuition and fees have risen nearly 80% across all types of universities since the early 1990’s, Federal aid per student has more than doubled, leaving the average borrower with a bill of more than $28,000 after graduation.”

The NY Fed report, titled Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Program, argues that students have actually seen relatively little benefit from the trillions the government has spent on student loans as colleges and universities have jacked up tuition enough eat up about half of the money loaned out.

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Getting a grip on student loans and the college tuition problem

According to the Fed report, annual student loan originations grew from $53 billion in 2001 to $120 billion in 2012. on the other hand, tuition increased on average by 46% in constant 2012 dollars between 2001 and 2012, an increase from $6,950 to $10,200.

Student Loans

Keep in mind, however, that tuition has not increased consistently public, private and community colleges, which makes an accurate analysis of the situation more complex.

As authors David O. Lucca, Taylor Nadauld, and Karen Shen point out, the laws of economics argue the more money made available to college consumers, the easier it is for colleges to continue to increase tuition. The Fed analysts ultimately determined that Pell Grants and subsidized loans create a passthrough effect of close to 55-65 cents on the dollar. In other words, for every $100 the federal government gives or loans a student, academic institutions boost tuition and/or fees by around $55-$65. Other types of student loans have somewhat lower passthrough rates.

Student Loans

The authors note: “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.”

On a historical note, some 25 plus years ago, former U.S. Education Secretary Bill Bennett cautioned that student loans were not a panacea, noting, “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.” This statement has come to be known as the Bennett Hypothesis, and this latest research seems to back it up.

Other factors also contributing to huge college tuition increases

One other factor that has certainly boosted higher education tuition over the last five or six years is that after the Financial Crisis in 2008, many newly unemployed workers flocked to colleges, especially community colleges, so arguably increased demand “naturally” spurred some of the recent tuition increases.

The Stifel report also highlights that “Increased access to Federal aid may not be the only factor at play, however, escalating the cost of a college degree. Rising administrative expenses, investments in infrastructures and technologies, as well as expanding sports programs have also been identified as drivers of tuition hikes. In either case, rapidly rising tuition costs are posing an increasingly large burden on America’s graduating youth, as well as putting taxpayers on the hook for funding the Federal tuition aid and footing the bill of unpaid student debt.”

See full PDF below.

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