College tuitions have soared over the past several decades, and so have federal grants and subsidized student loans. Many observers of the higher ed scene believe that easy credit has been a driving force behind the tuition hikes: The more Uncle Sam subsidizes student participation in higher education, the greater the pricing power exerted by colleges and universities. But correlation does not necessarily equal causality. Proof that escalating college loans enables tuition hikes has been hard to come by.
Three economists working for the Federal Reserve Bank of New York think they have found the proof. In a new paper, “Credit Supply and the Rise in College Tuition,” the authors note that federal loan programs have accounted for 90% of all student loan originations since the 2009-2010 school year, and 75% to 80% in the preceding years. Drawing from three separate Department of Education data sets, they show how closely tuition increases track changes in federal lending policy.
When we control for all forms of aid, we find that each additional Pell Grant dollar to an institution leads to a roughly 55 cent increase in sticker price tuition. For subsidized loans, we find a somewhat larger pass–through effect of about 70%. We also find a loading of tuition on unsubsidized loans of 30 percent. All of these effects are highly significant.
(Note: To the best of my knowledge, the Federal Reserve Board of New York is not a tool of the Koch Brothers or affiliated with the Tea Party)
Bacon’s bottom line: While increased federal support has made it somewhat easier for students to finance their college educations through borrowing, the higher ed establishment captures the majority of the funds. Little of the money has gone to hire more professors, increase faculty pay or otherwise improve the quality of education. Most of it has paid for bloated administrations. Meanwhile, outstanding student-loan debt has skyrocketed to more than a trillion dollars, creating a new class of indentured servants.
This is the hardest evidence yet that one of America’s most ideologically liberal institutional complexes, higher education, is also one of the most exploitative. Colleges and universities talk a good game about social justice, but in the end, they put their institutional prerogatives first. In the end, higher education has become a powerful engine of social injustice.
(The article first ran in Bacon’s Rebellion on July 16, 2015)