Student Loans May Be Driving the Tuition Explosion

Inflation is Too Cool for School
The costs of college tuition and fees have outpaced inflation for decades.

The surging cost of U.S. college tuition has an unlikely culprit: the generosity of the government’s student-aid program, a report by the Federal Reserve Bank of New York said.

Increases in federal loans, meant to help students cope with rising costs, are quickly eaten up by schools in higher prices, wrote David O. Lucca, Karen Shen and Taylor Nadauld.

Private colleges raise their tuition 65 cents for every dollar increase in federal subsidized loans and 55 cents for Pell grants given to low-income students, according to the report. College tuition has outstripped U.S. inflation for decades.

“The subsidized loan effect on tuition is most pronounced for expensive, private institutions that are somewhat, but not among the most, selective,” they wrote in a paper released this month.

The premise, raised in 1987 by former Education Secretary William Bennett, is more pronounced today as the sticker price of college has increased to $65,000 annually at some private schools. About two-thirds of undergraduates take out loans to fund their education. Outstanding student debt is now more than $1.36 trillion, according to the Federal Reserve Bank. Government loans account for the bulk, almost $1.2 trillion.

The government has made significant changes to the loan program since it began in 1965, such as giving parents access to federal loans and increasing annual borrowing limits for undergraduates.

Students took out $120 billion in education loans in 2012, up from $53 billion in 2001, with 90 percent of the borrowings backed by the government, according to the paper.

Tuition rose 46 percent in the period on average, “resembling the twin house price and mortgage balance booms,” Lucca and Shen of the Federal Reserve and Nadauld of Brigham Young University, said in the report.

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