The prohibitively high cost of a college degree has become a hot political issue.
Let's hope the politicians bearing supposed solutions will take time to read a report by the staff of the New York Federal Reserve ("Credit Supply and the Rise in College Tuition") that has just been released. According to the report one culprit in the rise of college costs is the federal government, which makes available more money for loans.
As Market Watch reports, when there is more money available people do what comes naturally, they spend it:
Rising college tuition has stoked the ire of students, families as well as politicians, and a surprising cause may be partially to blame: Expanded access to money to pay for school from the federal government.
For every extra dollar available to students in subsidized federal aid, colleges raise tuition by an estimated 65 cents on average, according to a staff report released by the Federal Reserve Bank of New York last week. The paper, which studies tuition patterns following Congress’ decision to increase borrowing limits in the mid 2000s, provides some insight into a question economists and higher education experts have debated for years — whether boosting access to federal aid incentivizes colleges to raise prices by giving students more ways to pay for school.
“It’s a pretty simple economic theory that if you have access to more money you’re probably going to be willing to pay for more for something,” said Eric Best, a professor at Jackson State University who co-authored the book “The Student Loan Mess: How Good Intentions Created a Trillion-Dollar Problem” with his father, Joel.
Former Secretary of Education Bill Bennett was one of the first to voice the idea that more federal money in education meant higher costs. It became known as the "Bennett Hypothesis." It should be emphasized that the New York Fed paper doesn't find that the availability of federal money is the only factor in skyrocketing college costs. Market Watch argues that it is a small factor. Sixty-five cents on the dollar doesn't sound small to me and, even if some of that dollar comes from non-federal sources, it still looks like Bill Bennett was a prophet.
Meanwhile, Senator Lamar Alexander has penned an article that argues that it is a myth that college costs too much money. I find it unconvincing. First, he factors in Pell grants and other scholarships, which he treats as free money. It is not: the burden is simply shifted to somebody other than the student (like the taxpayer). I don't regard as evidence of affordability Alexander's news that 98 percent of instate freshman at the University of Tennessee at Knoxville have a scholarship of some kind. I regard that as evidence of unaffordability.
Georgetown University costs even more [that a public institution]: about $50,000 a year. Its president, John DeGioia, told me how Georgetown—and many other so-called elite colleges—help make a degree affordable.
First, Georgetown determines what a family can afford to pay. It asks the student to borrow $17,000 over four years and work 10-15 hours a week under its work-study program. Georgetown pays the remainder—at a total cost of about $100 million a year.
Apart from grants, work and savings, there are federal student loans. We hear a lot of questions about these loans. Are taxpayers generous enough? Is borrowing for college a good investment? Are students borrowing too much?
I would say that Alexander and I see this differently. I don't see it as Georgetown making college more affordable: i see it as Georgetown showing ways for kids to get in debt to afford an education that in reality is beyond their means, unless they think graduating from college with a debt of $17,000 a good thing. That Alexander doesn't regard this as an onerous burden for someone emerging from college shows just how far we've come in seeing debt as the norm.
Alexander advocates such remedies as making federal-loan applications simpler to fill out (hey, let's make it easier to acquire debt!) and consolidating payments based on income. And here's my own personal favorite of the Alexander recommendations:
Change the laws and regulations that discourage colleges from counseling students against borrowing too much.
Discourage–that should do it.
What about discouraging the federal government from unrealistically inflating the cost of college?
Or instead of just discouraging, maybe we should find a way to dry up some of this money.