Fed Reserve Bank: Access to Loans Increasing College Tuition


The Federal Reserve Bank of New York has published research completed by its economists that suggests that increasing federal student aid results in colleges raising tuition, which in turn offsets the benefit to students. Joseph Lawler of The Washington Examiner says at least for the short term, additional loans do not increase college enrollment.

This evidence supports what is called the “Bennett Hypothesis,” which was developed by Reagan Department of Education Secretary William Bennett which said that increases in government student aid allows universities to increase tuition without decreasing enrollment. This is just one of many arguments in the ongoing debate over federal policy and the $1.1 trillion plus total US student debt that has grown as tuition rises.

The report also found that when Congress increased the availability of student aid, for-profit colleges’ stocks jumped, a fact that was found in some other research papers as well. In 2012, economist Stephanie Riegg Cellini and Harvard economist Claudia Goldin found that a larger amount of student aid led to tuition increases primarily at for-profit schools. Also, the National Bureau of Economic Research produced a paper in 2013 that found that some institutions of higher education reduced institutional aid when federal student aid was added.

It is clear that the rising costs of salaries and benefits for employees and the costs to install and keep updated the technology used in universities, as well as the price of adding state-of-the-art gyms and performance spaces, affect the amount of tuition necessary to keep schools functioning. But the increase in tuition is most prevalent in private institutions that are somewhat selective, reports Bernice Napach, writing for ThinkAdvisor. In other words, rising tuition is ocurring at institutions that enroll students who have the highest ability to pay.

The study concludes that “while one would expect a student aid expansion to benefit recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect.”

However, the paper acknowledges that these institutions have graduates who will earn more than others, which could make the increased tuition rates worth it. Mark Kranowitz, publisher of Edvisors.com and an expert in the fields of college planning and financial aid, believes the study is dangerously flawed.

“It becomes dangerous when it becomes an argument for cutting student aid when the reality is that student aid and especially grants are inadequate and low- and moderate-income students are priced out of a college education.”

“[Also] if increases in federal aid were the cause of increases in tuition, all students would shift to borrowing up to the [new higher] limits. They don’t.”

The preface to the paper itself explains that the findings are being shared to stimulate discussion and comments. Its basic premise is that when students fund their education through loans, the changes in student borrowing and tuition are interwoven. When tuition costs are raised, loan demands rise as well, “but loan supply also affects equilibrium tuition costs—for example, by relaxing students’ funding constraints.”

The study, “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs” was authored by David O. Lucca, Taylor Nadauld, and Karen Shen.