College Tuition, When Government Intervention Goes Wrong

$66,000. That’s roughly the sticker price of an education here at Swarthmore. Over four years, that works out to over $250,000, a fair amount more than the median price of a house in the United States. Admittedly, almost 60% of the incoming class received some amount of aid, totaling just under $40 million. But Swarthmore is unique among American institutions of higher learning in that all the aid given to students is provided in the form of grants that do not need to be paid back (that doesn’t mean students can’t take out loans if they or their families feel that the grant they receive doesn’t adequately cover the cost of college). Swarthmore students aren’t indicative of the situation that many college students find themselves in. Indeed, the total student debt holdings amount to over $1 trillion. To put that in perspective, that amounts to nearly 8% of US GDP. That’s a truly staggering number. But that begs the question, why is there such a sheer magnitude of student loan debt in America? Only ten years ago, the total student loan debt was just under $500 billion. That means that the debt has nearly tripled over a ten year period, far outpacing the rate of inflation. Perhaps some of this massive growth can be explained by the Great Recession of 2008. But what has gone in hand in hand with increases in student debt have been an increase in college tuitions costs. So what is driving these increases in the cost of college?

In 1987, U.S. Secretary of Education William Bennett proposed what’s become known as the Bennett Hypothesis. He argued that while federal financial aid does not directly cause inflation in the price of college, it makes it possible. The argument in favor of federal provision of financial aid is certainly a reasonable one and has its merits. The federal government provides subsidized loans which do not carry interest rates while the student is in college, or at least the government pays off the interest, making it easier for the student to pay off the loan after college. In addition, the government does provide Pell Grants for students who demonstrate a certain amount of financial aid. The government does also provide unsubsidized loans which immediately begin accruing interest that the student has to pay. These are arguably necessary for social mobility because they allow lower income students to have the opportunity to receive higher education. Estimates indicate that a college education can lead to an average of an increase of $1 million in career earnings, which can go a long way to lifting someone and their family out of poverty. These programs can certainly help to increase social mobility and allow people who would otherwise be constrained to achieve their full potential. But what if those same programs that on paper would seem to do so much to help out students in need are instead driving up the costs of college?

A 2015 study by the Federal Reserve Bank of New York found that for every dollar of federal subsidized loans institutions received, they raised their tuition by 65 cents. A similar increase in tuition was linked to Pell Grants (55 cents-on-the-dollar). So the federal money is causing the cost of college to rise. And this makes complete sense. If there is more money available for a college, they are going to do what they can to obtain that money. At its heart, a college is a business, and a business, or even a non-profit as many of these colleges are, relies on its cash flow. And colleges know that the money available to them from the government is for all intents and purposes limitless, as evidenced by the quadrupling in federal Pell Grants since 1980 (adjusted for purchasing power). If they keep raising prices, they know that the federal government will step in to make up the margin.

So that begs the question of what the solution is. A complete ending of federal financial aid, at least immediately, does not seem particularly prudent. That would leave countless students with no ability to pay for college, or at least a severely limited ability without taking out potentially crippling, high interest loans. Perhaps a gradual reduction in federal financial aid would be the appropriate course. If colleges realize that they can’t maintain excessive fees while still expecting students to matriculate, they will likely reduce their costs. Again, colleges rely on a stable cash flow, and if they lose a source of their income in federal financial aid, they will have to ensure that they have enough students who will decide to enroll. This should increase the quality of education that is provided by these institutions because it would cause competition to attract students. This would eliminate underperforming institutions that cannot succeed in a more competitive college market. Such changes would not have much of an effect on institutions like our own that have large endowments and are thus able to accommodate students, regardless of their need. If a dedication to ensuring that anyone that deserves to come here can is truly one of the core ideals of these “rich” institutions, they completely have the means to do so. They would have no reason to lower their tuitions, and in almost every case, that shouldn’t affect people’s ability to come here. And for those students that are not attending  such institutions, other institutions should be forced to lower their costs and provide a better quality of education so that students will actually attend. At the end of that day, it is the American people who win.

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