Long have liberals vowed to make higher education more affordable by offering ever more generous loan subsidies, and long have conservatives and libertarians argued that federal aid merely gives colleges license to drive up the price. A study by the New York Federal Reserve offers some new evidence that the latter group is correct. According to the study's authors:
We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65 percent. We also find that Pell Grant aid and the unsubsidized federal loan program have pass-through effects on tuition, although these are economically and statistically not as strong.
The argument goes like this: Since government aid programs make it easier for students to pay the sticker price of admission, no matter how high that price rises, universities have every incentive to respond by charging more. The universities have little to worry about—they get paid up front, regardless of how difficult it is for the students to repay the government (or the government's actual creditors: the U.S. taxpayer).
The new study does indeed find evidence of this connection between loans and price gouging. The Wall Street Journal's write-up portrays the issue as analogous to the housing bubble:
Imagine a scenario in which the federal government helps households pursue the American dream with ultra-loose credit, only to see prices skyrocket and families take on loads of debt they can't repay.
Yes, it sounds like the housing market of a decade ago, but some say it is also the challenge of today's higher-education system.
WSJ also takes note of some of the study's limitations, which nevertheless suggest that federal aid's distorting effect on tuition prices might be even more powerful:
One thing the latest research doesn't address is the effect of student aid on graduate-school tuitions, which have disproportionately driven the surge in student borrowing. And grad school is perhaps where the market is most distorted by federal policies.
The federal government limits how much undergrads can borrow—up to $57,500 total—but doesn't for grad students, who can borrow to cover any amount their schools charges through a decade-old program known as Grad PLUS. Economists say that has given institutions unprecedented pricing power. Debt-forgiveness programs also could be desensitizing grad students to high prices.
Andrew Gillen, a researcher for the Charles Koch Foundation who has studied the economics of higher education for years, told WSJ that graduate school tuition hikes didn't outpace undergraduate tuition hikes until after the implementation of Grad PLUS—implying that easier access to federal dollars is indeed a likely culprit.
The implications of these findings are massive. Liberal policymakers—President Obama and Sen. Elizabeth Warren among them—shouldn't be let off the hook when they offer young people (and some middle-aged and even old people) the same tired promises about making higher education more affordable. College becomes less affordable with each passing day, and federal intervention is at least partly to blame.