Student Aid May Be to Blame for Sky-High College Tuition: NY Fed

A New York Fed study finds that the increased availability of subsidized student loans and Pell Grants accounted for 55% to 65% of the increase in college tuition costs

The expansion of aid could have cost students more in the end, the New York Fed says; others are skeptical. The expansion of aid could have cost students more in the end, the New York Fed says; others are skeptical.

Ever wonder why college tuition and fees have consistently increased 3% to 4% on average over the past 30 years — far more than the rate of inflation?

There are, of course, the rising costs of salaries and benefits for employees plus costs to install and update technology and to add more amenities like state-of-the art gyms and performance spaces. But that omits a key factor, according to the New York Federal Reserve Bank. A new study by New York Fed economists finds that increases in caps for federal student loans and grants are a key factor for rising tuition.

More specifically, the study found that the increased availability of subsidized student loans and Pell Grants accounted for 55% to 65% of the increase in tuition costs, as measured by their sticker price. The greater availability of unsubsidized loans had a lower 30% pass-through effect.

The study also found that the “subsidized loan effect on tuition is most pronounced for expensive, private institutions that are somewhat but not among the most, selective.” It defines those institutions as having “mid-tier” admissions rates, rank in the top quartile for tuition costs and enroll students who have the highest ability to pay, in other words, expensive private institutions that many middle- and upper-class students attend. No names are mentioned.

The study concludes that “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.”  But it also notes that college graduates earn higher wages than others, which suggests it may be worth the cost.

Mark Kantrowitz, a noted expert on financial aid and college planning, now publisher of Edvisors.com, says the New York Fed study is flawed and dangerous. “It becomes dangerous when it becomes an argument for cutting student aid when the reality is that student aid and especially grants are inadequate and low- and moderate-income students are priced out of a college education.”

The study is flawed, says Kantrowitz, because it focuses on sticker prices instead of net prices, and fails to consider the real possibility of pent-up demand for loan limit increases since there were none between 1993 and 2006. In addition, he says, “if increases in federal aid were the cause of increases in tuition, all students would shift to borrowing up to the [new higher] limits. They don’t.”

In addition, Kantrowitz says, “Nobody in their right mind believes that a $5,775 federal Pell Grant causes a college to charge $50,000 to $60,000 a year.”

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