Chart: More Aid = More Pain
This chart comes from a recent staff report from the Federal Reserve Bank of New York, which took 51 pages of dense economic jargon and methodological explanations to tell us what many of us commentators already knew. A big reason, if not the main reason, for the rapid rise in college tuitions over the past few decades has been the steady increase of Federal financial aid in the form of grants and loans. After all, we cannot attribute the cost increases, which would naturally go down in the face of lower demand, to rising wages or increased savings rates among Americans.
No, it seems that the main source of the pain of tuition increases has to do with the government’s number one solution to it.
As far back as 1987 Secretary of Education William Bennett argued that government aid packages “have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.” Of course they did. Any time you throw more money into a system of limited supply, whatever the source, the only natural response is to increase prices to the level of the new demand. The irony, of course, is that with each round of price increases the government responds with more aid, mostly in the form of student loans, to “make up for” this increase, and the cycle continues ad infinitum.
According to the report, the correlation between student aid increases and college costs is fairly direct, though not 1:1. By their estimates, for every dollar increase in Pell grant funding costs rise by $0.55 and for every dollar increase in loan funding costs rise by $0.65. No wonder charts tracking tuition rises roughly ape charts that track student aid increases.
To make matters worse, student loans are truly easy money to come by. We have other consequences to fear from this, much as we do anytime mortgage programs become unduly loose in their lending standards. Student loans have a particular set of dangers unmatched by other forms of financing. Further, the loans continue to rack up in larger and larger increments in the face of relatively stagnant wages.
Nobody wins at this game. If we continue on the present course we truly have hell to pay across the board, at the student, school, government, and societal levels all. Instead of demanding more government help on this front, perhaps it’s time we ask Uncle Sam to step aside. College was much more affordable before he got involved in making it more affordable.