Part 2: Understanding the Student Loan Crisis

Thinking of federal student loan programs and the college response, I recalled this line from The Godfather:

Where are we gong? To the incentives that student loans created for colleges.

The Tuition Impact

Let’s begin with a list:

Almost 30 years ago, Ronald Reagan’s Secretary of Education, William Bennett noted a connection between student loans and college tuition. Called the Bennett Hypothesis, he said, “increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions…” Now, through a new study from economists Claudia Goldin (Harvard) and Stephanie Cellini (George Washington U.), we have facts that are “consistent with a variant of the Bennett Hypothesis.”

Our story starts with Title IV of the 1965 Higher Education Act. Providing grants and loans to post secondary students, the act sent a tidal wave of money to for-profit colleges, sometimes 90 percent of their revenue. As a more likely destination for less affluent students, those for-profits offer an assortment of degree opportunities that include vocational certificates and associate’s degrees. Their “majors” range from taxidermy and cosmetology to business.

Comparing tuition at for-profits that are and are not Title IV eligible, we can infer the impact of student loan federal programs that include Stafford and Perkins loans and the PLUS program for parents. The key is a school’s COA (cost of attendance). Composed of expenses like books, food, and tuition, an eligible school’s COA determines the size of a student’s aid.

You see where we are going.

For-profit schools have the incentive to boost their COAs. How? Tuition. The tuition is higher at the schools that get the federal funding. And yet, rather than course quality, those tuition dollars target the bottom line or recruitment.

Below, some Florida stats. For all sub-baccalaureate programs, the tuition difference between Non-Title IV and Title IV for-profits is a whopping $13,598 (they have a typo). The cosmetology programs have the smallest tuition gap.

From: “Does Federal Student Aid Raise Tuition? New Evidence On For-Profit Colleges”

Our Bottom Line: Supply and Demand

Never underestimate the power of the market. When a subsidy increases demand, we have a price increase.