A new report by the Federal Reserve Bank of New York has found that the massive investment in grants and student loans by the federal government is a major contributor to the unbridled growth in the cost of attending college.
College tuition rates have consistently risen faster than inflation for some 25 years. One theory for the rise, dubbed the “Bennett hypothesis,” was put forward by Ronald Reagan secretary of education William Bennett, who argued that hikes in government student aid simply gave colleges a free pass to hike tuition.
Now, the New York Fed’s research suggests there’s some merit to the idea, and that it means the government could be spending billions on education to no effect.
“While one would expect a student aid expansion to benefit recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect,” the paper concludes.
On average, the report finds, each additional dollar in government financial aid translated to a tuition hike of about 65 cents. That indicates that the biggest direct beneficiaries of federal aid are schools, rather than the students hoping to attend them.
As Neff notes, this finding is consistent with some earlier studies on the subject, such as a 2012 paper by Harvard and George Washington University economists, and a 2007 paper that found that higher Pell Grants drove up tuition at private schools as well as out-of-state tuition for public schools.
Earlier, Andrew Gillen, research director of the Center for College Affordability and Productivity, also reached the conclusion that federal financial aid fuels college tuition increases. In a colloquy on Gillen’s research, I concurred in this conclusion, while also noting that increased federal regulation has also fueled tuition increases—as have rules and red tape imposed by states and accreditation agencies. (A recent report by college presidents notes that under the Obama administration, the Education Department has flooded the nation’s schools with new rules that have never been properly vetted or codified, in violation of the Administrative Procedure Act.)
Education analyst Neal McCluskey of the Cato Institute cited four additional studies showing that increased government spending on student aid results in large tuition increases.
In 2011, Virginia Postrel wrote at Bloomberg News about how federal subsidies intended to make college more affordable have instead encouraged rapidly rising tuitions.
By subsidizing college, federal financial aid diverts young people away from vocational training that receives fewer subsidies but can lead to jobs with better pay and more value for America’s economy. In City Journal, Joel Kotkin described the increasing demand (and correspondingly attractive pay) for workers in manufacturing, who often need vocational training rather than college educations.
Yet states spend billions of dollars operating colleges that are little better than diploma mills in terms of academic rigor, yet manage to graduate few of their students—like Chicago State University, “which has just a 12.8 percent six-year graduation rate.” “Our colleges and universities are full to the brim with students who do not really belong there, who are unprepared for college and uninterested in breaking a mental sweat.” Nearly half of the nation’s undergraduates learn almost nothing in their first two years in college, found a 2011 study by experts like NYU’s Richard Arum, and 36 percent learned little even by graduation. Although education spending has mushroomed in recent years, students “spent 50% less time studying compared with students a few decades ago.” As George Leef of the Pope Center for Higher Education Policy noted, the National Assessment of Adult Literacy also indicates that degree holders are learning less.
Wastefully run colleges can now increase tuition even faster, at taxpayer expense, as a result of the Obama administration’s recent expansions of the Pay As You Earn program. The Pay As You Earn program limits borrowers’ monthly debt payments to 10 percent of their discretionary income. The balance of their loans is then forgiven after 20 years—or just 10 years, if the borrower works for the government or a nonprofit. It will cost taxpayers a lot, while doing nothing for most student borrowers (who will experience tuition increases as a result), and it will favor imprudent borrowers over prudent borrowers.
In February 2015, the Obama administration revealed that its expansion of this program will cost taxpayers more than $9 billion.
Most students chose inexpensive colleges or borrowed modestly, meaning “the average graduate’s debt level of $27,000” is no more than “the price of a car.” They will not choose to participate in this program, since they would pay more, rather than less, by paying ten percent of their income for years, which could add up to much more than $27,000 over a 20-year period.
But, imprudent borrowers who borrowed much more than that for useless majors will likely participate, since they will now be able to limit their payments to a fixed percentage of their discretionary income, and then have the unpaid balance remaining after 20 years (or just 10 years, if they go to work in the federal bureaucracy) written off at taxpayer expense, no matter how huge the unpaid balance is. The result is that they will pay the same amount over 20 years (or 10 years) no matter how much their high-priced college charged in tuition—eliminating any incentive for such colleges to keep costs under control, or to keep their tuition from escalating at a dramatic rate. Georgetown Law School gamed the Pay As You Earn Program to make taxpayers absorb the entire cost of educating of its left-leaning “public interest law” students, through creative accounting.