Is federal aid driving up tuition costs? Economists say so.

New York Federal Reserve study supports the conclusion

The theory that federal aid plays a major role in driving up tuition is gaining support from mainstream economists, Josh Mitchell reports for the Wall Street Journal.

And a New York Federal Reserve study released in July supports the notion. 

Researchers found:

  • For every additional dollar in subsidized student loan caps, tuitions rose by up to 65 cents; and
  • For every additional Pell Grant dollar, tuitions rose by 55 cents; and
  • Private schools' tuitions grew more than public's.

The findings are similar to those of a 2012 study that looked at for-profit tuition prices.

Some economists worry that—much like the housing crisis of 2008—the government is creating an economic bubble, by making money easy to borrow or receive, so consumers are willing to pay more for college. Then prices go up and borrowers take on more debt than they can handle, which ultimately ends in an economic crash. 

Related expert insight: Are today's students migrating to value?

From 2001 to 2012, annual student loan disbursements (mostly federal) more than doubled, according to the study. The amount borrowed per person grew 58% after inflation—to $5,777 a year. 

Over the same period, Pell Grants more than tripled to about $30 million a year and education tax credits about quadrupled to approximately $20 billion annually.

Meanwhile, from 2000 to 2014, consumers' out-of-pocket expenses for both undergraduate and graduate tuition grew on average by 6% a year. Medical-care costs grew at an average of 3.8% and overall consumer prices increased by just 2.4% per year.

However, critics point out that the study only examined sticker prices—not the net prices, which grew by much less.

Additionally, the study does not look at the relationship between student-aid and graduate school tuition, writes Mitchell.

Grad school prices have largely driven the increase in student borrowing, he says, and unlike undergraduates, these students do not have a limit on how much they can borrow (Mitchell, "The Outlook," Wall Street Journal, 8/2).

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