Friday, April 23, 2010

Do Student Loans Increase College Costs?

Since Lyndon Johnson signed the Higher Education Act in 1965, federal student loans have broadened access to many institutions of higher education. Students from even modest backgrounds have been able to receive loans that do not require repayment until after school completion. However, an unexpected result of these student loans could actually be college cost inflation, negating much of the benefit they have created.

The cost of a four-year degree has doubled in the past 10 years. Data has shown that over time, tuition typically increases at twice the rate of general inflation.

The availability of federal student loans is likely a factor in rising tuition. The market for higher education is, in some ways, similar to other markets. In the general macroeconomy, excess money supply increases overall demand for goods and services, creating inflation. The almost unlimited funds available immediately to students probably have a similar inflationary effect on tuition costs.

College costs rise because of distortions in consumer behavior. If students had less to spend (could not borrow indefinitely), and a better idea of how much they were spending (they were more financially savvy and had earned a larger portion of the money before spending it), colleges would have to work harder to keep tuition costs low. There would be more pressure on higher education institutions to demonstrate their value per tuition dollar. Instead, colleges can grow much more expensive year after year with little pushback. They are more likely to build fancier buildings, recreation centers, and dormitories – which have little bearing on the quality of education provided. Schools are also increasingly hiring more high-paid faculty that have only a secondary concern for student education.

In the case of state supported institutions, government can cut aid with less opposition. Tuition will rise, but students can still attend. The percentage increase will only be a number that results in more borrowing per student.

It is apparent that many students are allowed to take on loans that will be difficult if not impossible to repay in the future. The government encourages students to borrow—and schools collect money from students—without question. This is often true for students who attend expensive institutions, but study subjects that are unlikely to lead to high paying careers. While it is hard to quantify, we must consider the impact of incurred debt on recent graduates’ career choices. Recent graduates with debt will be less likely to enter lower paying careers in public service, the arts, or humanities. For many, the career trade-off is not between a life of luxury that of basics. It is between basics and a life of unsustainable personal debt.

An especially troublesome occurrence is when economically disadvantaged students, many of whom are the first in their families to attend college, begin their studies after taking out loans. Many of these students need to drop out at some point (to earn additional income, to take care of children, etc.). These drop-outs face the double burden of large debt and the lack of a degree. Because of their difficult economic circumstances, they will have an even harder time handling the debt.

As a society, we must question the long-held assumption that a high-priced four-year degree is always the best choice for a recent high-school graduate.

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