Tag Archives: government grants

How Federal Student Loans Increase Tuition and Decrease Aid

Conventional wisdom says that expansions in federal student aid will result in a more affordable and equitable post-secondary education system. While this belief has motivated massive expansions of federal aid in the recent past, rapidly increasing tuition and student loan default rates are raising questions about this approach.

In a new study, I review the basic statistics and recent research, and conclude that: 1) further increases in federal support for higher education are likely to be counter-productive because they lead to higher tuition for all students, and 2) the system of student loans should be reformed to mitigate the student debt problem.

Related: Default on Student Loans? Bad Idea

Average gross tuition and fees for undergraduate studies increased more than three-fold in constant dollars from 1980 through 2014—even faster than the rate of increase in health care prices. The increase is widespread across several types of higher education institutions: private non-profit, public two-year and four-year—although private for-profit institutions have recently seen a decrease.

At the same time, government support for higher education in the form of tax benefits, grants (veterans and Pell), and loans has exploded since 1994, and especially since 2000. Grants and loans totaled almost $170 billion in 2014 (constant dollars), up from just over $50 billion in 1994.

Whereas earlier studies showed mixed results, recent studies using refined data and techniques consistently find that increased federal support for higher education leads to a significant increase in tuition and decrease in institutional aid. In fact, there is some indication that state aid for higher education is itself negatively related to the extent and nature of federal government support.

Related: Making  a Bigger Mess of Student Loans

Increases in federal support for higher education have been focused on student loans, yet these increases are actually detrimental to the finances of many post-secondary students. One study found that students’ college decisions were almost as responsive to the offer of loans as to grants, even though they have to pay back loans.

Different measures of student loan default rates and repayment burdens uniformly show significant increases in recent years (as much as a doubling), across all types of institutions and students. Furthermore, the expanded use of deferment, forbearance, and, especially, income-related repayment plans hides an even larger increase in losses to taxpayers on these loans than the rising default rates would indicate.

Students from non-traditional backgrounds seem to have been harmed most by the increase in federal student loan amounts available. They have not seen increased incomes as workers, often have not completed their educations, and are much more likely to default on their loans, while missing out on job-related income and training while enrolled in college.

In addition, enrollment in higher education, as a percent of the young adult population, and in the supply of college-educated workers as a percent of the workforce, has steadily increased over the past four decades. Almost 70 percent of recent high school graduates are currently enrolled in some type of college. The increase is most notable for public two-year and for-profit colleges. Except at the top 10 percent of colleges and universities, average student quality in higher education institutions has declined.

The earnings premium for a college education over a high school education has held steady over the past 25 years. This contradicts the claim by some economists that the relative supply of college-educated workers has been dropping and the earnings premium increasing. It also debunks the claim as an explanation for increased income inequality or a justification for even more government support for higher education.

Further increases in federal support for higher education are not needed and indeed are likely to be counter-productive because they lead to higher tuition for all students. The resultant increases in tuition, decline in average student quality, stagnation in wages, and increases in student loan defaults should lead policy makers to question whether the massive increase in federal support for higher education is achieving its goals.

It is quite likely that reducing subsidized student loan availability to upper middle-income families could be beneficial to the system by leading to a general lowering of tuition and reducing the loan burden on future workers.

The entire system of student loans, especially repayment options, needs to be rationalized and redesigned; in particular, the salience of loan repayment to students needs to be strengthened and losses to taxpayers reduced.

There are many indications that a system of universal higher education, which is where we have been heading, is wasteful. This is particularly true if college completion is mainly a signal of perseverance and effort more than actual preparation. Rather, a robust parallel system of on-the-job training, apprenticeships, and youthful practical work experience is needed—supported by changes in federal laws and regulations, such as lowering the minimum wage for younger workers, to encourage its creation.

This article was published originally in Economics21, a website from the Manhattan Institute.

We Have Too Many Colleges, So Cut Federal Funding

We have clearly oversold higher education. Through subsidies and political hype, we have prodded huge numbers of students to flock into colleges and universities. Naturally, those institutions also expanded in number and in the volume of students.

Now that it is becoming evident that a college degree isn’t necessarily a good investment and for many is a terrible waste of time and money, many schools are struggling, causing Washington Post writer Jeffrey Selingo to write a July 20 column, “How many colleges and universities do we really need?”

Selingo correctly observes, “At too many colleges attended by the vast majority of American students, costs are spiraling out of control and quality is declining.”

That’s right. As we’ve poured more and more government money into college “access,” schools have pocketed much of the money and gone on a spending spree – and then increased their tuition and fees, leading politicians to cry that they must increase student aid more to keep higher education “affordable.”

And it’s true that quality has declined.  A high percentage of today’s students (*far higher than, say 40 years ago) are academically weak and disengaged. To accommodate such students, most schools have lowered their academic standards and allowed the curriculum to degenerate into a hodge-podge of trendy, often frivolous courses.

I agree with Selingo’s diagnosis, but not his proposed cure. He writes, “What we need is a federal commission similar to those that have been tasked with closing military bases over the years. In the case of higher education, this commission wouldn’t just recommend colleges for closure, but it also could identify where mergers or alliances could produce the best solution for clusters of struggling institutions.”

That is a bad idea. Federal political meddling is the very reason why we have the problems we do. Looking to still more of it to solve those problems is extremely naïve.

The main problem is that the analogy to closing military bases is a poor one. We had quite a few bases that were unnecessary. But while quite a few public colleges and universities suffer from low graduation rates and job placement overall, it is often the case that some parts of those schools are worthwhile. A college’s English major might be a joke but its biology major academically solid. Swinging a political – and a federal commission will certainly be highly political – is apt to chop away the good with the bad.

Selingo does suggest that the commission doesn’t just have to close schools, but could also recommend mergers and alliances. Fine, but school administrators can and have been doing that. Why expect better results from appointed commissioners than from school officials who have more direct knowledge and stronger incentives to make good decisions?

Instead of a top-down solution, we need a bottom-up solution. We’ll continue to have enormous waste and inefficiency as long as the federal faucet keeps pouring easy money into higher education. Shut off the faucet and then the invisible hand of market competition will get busy.

The weakest students will stop enrolling without the subsidies. When they stop showing up, administrators will have to prune away the worst majors and departments that cannot be sustained. Cost-saving mergers and alliances will be more avidly explored, but administrators who are best positioned to assess the pros and cons.

A doctor knows to always look for the root cause of an ailment and to deal with it – not just ameliorate the symptoms. With higher education in America, the root cause is the fact that easy money has terribly distorted the decisions of both students and school officials.  We must deal with that.