Thursday, April 26, 2012

Does the Availability of Student Loans Drive Up Tuition?

President Obama was here at CU recently taking some great pictures at a local hang-out and talking about student loans.  I'm not going to get into the political issues around student loan interest rates, but something from the discussion caught my interest - the idea that the availability of student loans has caused tuition to rise.  A survey released today shows that 47% of Americans believe that it has.  Clearly the idea behind making student loans more available is not to drive up the price of tuition but rather increase access to higher education, so if in fact easy access to student loans drives up prices then we have a serious problem.

I don't have an answer to this question, but here are a couple bits of data to mull over from the College Board's Trends in Higher Education reports. First, here is the average inflation-adjusted cost of college tuition relative to 1981. 
The fact that a college education today is somewhere near three times as expensive as it was 30 years ago even when adjusting for inflation is alarming, and the natural call is to find ways to make it more affordable, particularly for low-income families.  Student loans are often touted as ways to help many more students for less than it would cost to simply fund the university directly with state or federal funds.

The second graph shows the inflation-adjusted pool of money available for student grants (in blues) and loans (in reds and oranges) per student over the last decade.

From 2000 to the present, tuition has gone up by about 50% and the total financial aid per student has increased by almost exactly the same percentage from about $9,000 per student to a little over $14,000 per student.

Of course correlation does not imply causation and frankly it may be that the increase in tuition is driving the increased availability of financial aid, not the other way around, but I do find this idea intriguing.  As people that have spent a lot of time at colleges, I'm interested in your thoughts.  Does increased financial aid lead to higher tuition and if so how can the government help keep higher ed affordable?


  1. Nick,

    Very interesting.  I also have heard people arguing student loans cause tuition to go up but I have never seen any data suggesting correlation or not.  I personally don't know how  an increase in student aid *wouldn't* lead to a higher tuition cost since, as soon as students have more to spend on school I have a hard time thinking schools won't try to capitalize on that.

    I mean, if Jonny has 10% more to spend on education this year then last year why not, given schools have economic burdens just like everything else, try to get Jonny to some more of that extra money to tuition?

    Anyways, I'm not trying to make a policy statement just pointing out I would expect this. Thanks for the data Nick.

  2.  The thing that makes me skeptical of that connection is the fact that public universities where generally universities have the least freedom to increase tuition have seen the biggest tuition increases.  I could imagine that the tuition increases are what drive increases in financial aid, not the other way around.  I'm not sure how to test either model, but I do think that if we, as a country, want to make higher ed more affordable we should do it by funding the universities directly rather than this indirect game of providing ever-increasing tuition bills paid with ever-increasing student loans.

  3. I agree that increasing the level of tuition and student loans is really just taking us backward from an educational standpoint.  This is not the solution.  However, I don't know if funding the universities directly is the answer either, at least, not without some strings attached.  (Otherwise, the tuition would still just keep going up.  Universities can always use more funds.  Throwing in more money won't fill the hole.  It will just expand the scope of what a university tries to do in order to attract more students and more donors.  If you are going to try and secure better funding for the university directly so as to take some burden off of the students, you have to have regulations to make sure it really does go toward relieving the burden of the students and not toward expanding the university's "wouldn't it be nice if..." list.) 

    I really haven't spent a lot of time thinking about this, but it seems to me that there are a couple of options.  We could increase government subsidies of higher education with the necessary strings attached.  The limiting case here is this becoming similar to public K-12 education -- free for all, but with maximum government oversight.  Personally, I'd like to see us prop up the junior colleges, have some sort of (publicly funded) national degree accreditation or certification program for various degrees, and work to remove some of the professional stigma attached to getting a BS from a (properly certified) local or community college (or conversely, remove some of the artificial clout attached to the big-name schools -- because, honestly, does it really matter where you went to learn Newton's laws or differential equations?).  If there weren't so much of a professional disadvantage to getting a bachelors from a local college, these could be a much better option for many people out there.  This might even force the larger universities to decrease tuitions a bit to stay competitive.  (As long as we have a good way to help the top-notch universities maintain top-notch research and education programs, and to keep the local colleges from becoming as expensive as the big ones.) 

    Like I said, I haven't given this a lot of thought.  It's a hard problem to maintain high quality but without charging people through the nose.  I really don't know. 

  4. I will discuss one more issue that bothers me while we are at this.  On one hand I would like everyone to have a college education I *really* would.  But on the other, there aren't enough jobs to go around that really require a college level education.

    For this reason, students are increasingly having a hard time finding a job sufficient to pay off their student loans.  Part of this may be the fault of the student taking out too many loans, and part of this may be a university system not as efficient as it could be and so costs are higher then they should be.  But part of this also has to be that the system is set up so that it is easy to go to college and rack up huge debt whether there is a job with the capacity to fund this debt or not.

    So again don't get me wrong: I honestly would like every American to go to college.  But I also know we seem to have a system where we people are allowed to take out a level of loans that the market frankly can't seem to support with high paying jobs.

  5.  For almost all public universities there is some degree of oversight from the state government.  For CU, the university chancellor generates the budget request including any tuition increases, then the regents who are elected officials can change it however they want, and finally the state legislature must approve any increase in tuition.  That's a long way of saying I don't think that universities would simply dump the money into a hole.

    In my opinion, if you want accessible public universities there needs to be a significant level of funding from the states.  Only 4% of CU's budget comes from the state, so in some sense it's not really a state university anymore, so no wonder it's tuition has gotten very high.

  6. I know we have all heard about the pains of the recent college grads, but if you look at the unemployment rate broken down by level of education, currently only 4.3% of those with a Bachelor's degree or higher are unemployed compared to 6.8% of those with an Associate's degree, and 9.4% of those with a high school diploma.  That says to me that says that while as a nation we might need more jobs overall, we aren't over-saturated with college grads.

    Along the same lines, when was the last time you read one of those "Recent college grad with no job" where they talked about an engineer, chemist, or math major that couldn't find a job?  Just because there are unemployed pottery majors with $100k of student debt doesn't mean we need fewer college grads.

  7. Nick,
    What are the justifications by the universities for increased tuition beyond inflation?
    We encounter similar problems in medical cost as well.
    My gut feel is that we do not measure “inflation” honestly and correctly. 
    A correlation of tuition and total compensation of the university presidents and top admin staff would be interesting.  Obviously, it has to be without inclusion of sport coaches!
    Now, if the financial industry can provide 30 year fixed rate mortgages (current rates around 4%), why is it that hard to fix the student loan rates and duration? 
    Finally, should there be different rates for different fields of studies? 

  8.  I've got a short post that should appear tomorrow that has some data on some of the issues you raise.

    I also do like the idea of having different levels of tuition or financial aid for different majors, however I think we're doing it exactly wrong.  At CU, for example, accounting and engineering majors pay more tuition than other majors.  I think we're doing that wrong.  We should correlate effective tuition with unemployment rates for recent grads in that major, thus encouraging more students to go into fields like engineering.

  9. The answer to the question is yes.  Of course it does.  When there are more resources available for the purchase of a product, the price will increase to consume those resources.  It would be the same if the university system were being funded by taxes.  If more money is available the price goes up.

    Increases in student loan debt and tuition costs don't bother me.  The real question is what is being traded for them.  We've simply made a decision as a society that we would rather have people under 40 use their incomes to pay off student loans rather than buy houses.  We would rather they borrow to finance and education than borrow to finance a home purchase.  This doesn't hurt me or probably anyone else here.  The people it hurts are Baby Boomers who want to retire and helps financiers of student loans.  It's a simple public decision to trade one set of economic winners for another.

  10.  Well, it's not completely that simple.  Yes, it is just economics at work, but it is still being driven by people-made decisions.  It's not that these people have to borrow to finance an education rather than borrow to finance a home.  It's that they have to borrow to finance an education and then borrow again to finance a home.  Sure, we're trading one set of economic winners for another, but the new set of winners are a much smaller subset of humanity than the former.  Furthermore, most of the people who are currently at a disadvantage are not in a position to exercise power to make the decisions.  This is inequitable.  This is why so many of us have a problem with it. 

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