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Student Loans Lead to Rising College Costs

By Arthur M. Hauptman

Arthur M. Hauptman is a higher education policy consultant and author in Arlington, Virginia.

The following was adapted form an article written for Trusteeship, published by the Association of Governing Boards of Universities and Colleges.


Arthur Hauptman
CONGRESS ESTABLISHED the National Commission on the Cost of Higher Education in 1997 to investigate the growth in college costs and to suggest what, if anything, the federal government should do about it. Under the auspices of the Council on Aid to Education, I wrote a report to the commission with Cathy Krop, a researcher with the RAND Corporation, that examined the relationship between college costs and federal student aid. We reached two conclusions:

The ready and growing availability of federally sponsored loans has been a key factor in the rapid growth of college tuition and other charges over the past two decades–a period when tuition has increased at roughly twice the rate of inflation.

Federal grant aid has played a less substantial role in growth of college tuition than loans, in large part because grants now provide far less financing than loans.

In its final report, the National Commission essentially ignored the relationship between student loans and college tuition, relegating our report to an obscure footnote.

Skeptical commission members and other critics made the following two arguments for not addressing this issue: First, they said no empirical evidence exists that loans contribute to college cost increases or that college officials are using federal student aid programs to gouge the public; and second, even if federal loans have contributed to tuition increases, there is nothing short of price controls that the federal government can do to address this issue.

  Related information
  A Short History of the Cost Commission
The question of whether federal student aid has fueled the growth in tuitions and other charges has been the subject of heated debate at least since the mid-1980s when Secretary of Education William Bennett argued that colleges and universities were chasing their own tail by relying on federal student aid to raise their tuitions and other charges at a rate much greater than the general rate of inflation.

An alternative view advanced by most higher education officials has been that there is no correlation between increases in federal student aid and the rapid growth in tuitions and other charges.

As is often the case in public policy debates, both positions probably have been overstated.

The proportion of total costs of attendance met through federal student aid–grants, loans and work-study–has increased dramatically over the past two decades. Federal student aid in 1975 represented less than one-tenth of the total costs of attendance in the public sector and less than one-fifth in the private sector.

In 1995, federal aid paid more than two-fifths of the total costs of attendance faced by college students. Federal aid covered nearly one-half of the total costs of attendance for public college students and nearly two-fifths of the costs for private college students.

Federal loans have become a particularly important source of funding for college students and their families. Federal loans accounted for more than one-third of total costs of attendance in 1995, compared to less than one-tenth in 1975.

Given the growing importance of federal loans in paying for college, it is increasingly difficult to argue that they have had no effect on tuition-setting at many institutions. This is not to say that college officials stay up nights figuring out how they can set tuition and other charges to maximize the federal aid eligibility of their students. Many other factors probably play a more important role in tuition pricing decisions.

At the very least, however, the tremendous growth in the availability of federal loans has facilitated the ability of both public and private colleges to raise their tuitions at twice the rate of inflation for nearly two decades without experiencing decreases in enrollment or other clear signs of consumer resistance. In particular, it seems evident that private colleges could not have stabilized their share of total enrollments over the past two decades without the tremendous expansion in federal loan availability.

The potential effect of federal loans on college tuition levels is magnified by the fact that, since 1981, student eligibility for the federal in-school interest subsidy has been determined by subtracting family resources and grant aid from the student’s total costs of attendance. As a result, eligibility for loans and loan subsidies grows as tuitions and other charges increase, constrained by the amount of annual and cumulative loan limits. Thus, whenever federal loan limits increase, the potential link between tuitions and loans strengthens.

  Related information
  Chart comparing Congressional Requests with the work of the National Commission on the Cost of Higher Education
By using total costs of attendance, the federal aid formulas also ignore the growing use of discounting at many institutions. Both public and private institutions have greatly increased the discounts they provide in the form of grant aid from their own resources. While more and more students and families do not pay the full sticker price for tuitions, fees, and room and board, the current aid system continues to calculate federal aid eligibility as though the stated costs are what people actually pay.

When the discounts provided by institutions are subtracted from the total costs of attendance, federal student aid in 1995 covered more than half of public sector costs of attendance minus institutional aid and nearly half of the “net” private sector costs of attendance.

Although federal policies have not been the principal factor in the growth of college costs and tuitions, the federal government should consider taking two steps to reduce the potential impact of federal student aid on college costs:

First, the federal government should no longer recognize total costs of attendance in determining eligibility for federal loan subsidies. Instead, only a portion of tuition (say, 50 percent) over some base level (e.g., $3,000, average public sector tuition) and a standard amount of living expenses should be used in determining eligibility for federal loan subsidies. In addition, there should be an overall limit on the amount of federal aid students may receive in any year.

The combination of partial cost reimbursement and an annual limit on federal aid would have other beneficial effects in addition to moderating incentives for tuition inflation. Federal loan subsidies would be better targeted on students from lower income families, unlike current policies in which students with family incomes well in excess of $100,000 are subsidized if they attend high-priced institutions.

While some will argue that the proposal for partial cost reimbursement is a form of price control, it is not. Institutions would not have to charge below a specified limit in order for their students to be eligible for federal student aid; nor would the federal government need to monitor what institutions charge.

Federal price controls and federal monitoring of college charges are inappropriate mechanisms for dealing with the issue of college costs. However, it is clear that the federal government has a right and a responsibility to the taxpayer to make a policy determination about how much of tuitions and other charges it is willing to subsidize.

Second, the federal government should reduce the regulatory and reporting requirements for institutions that demonstrate they are doing a good job in administering the federal student aid programs.

Many college officials argue that the costs of complying with a wide range of federal laws, regulations and reporting requirements have been an important factor in the overall growth of college costs and tuitions.

In the federal student aid programs, the prevailing philosophy in both statute and regulations has been to impose the same rules and reporting requirements on all institutions regardless of how well they administer the federal aid programs. Thus, an institution with a student loan default rate of two percent must comply with the same set of requirements as an institution with a 20 percent default rate.

A system of performance-based deregulation could be designed to make distinctions among institutions, based on a series of readily available program performance indicators.

Such a shift in regulatory philosophy in the federal student aid programs not only would reduce the costs of high performing institutions, it also would allow federal officials to focus their limited resources on institutions that demonstrably are not performing at a minimum level.

The fact that the Cost Commission was unwilling to address the relationship between college tuition and student loans does not mean a relationship does not exist. The public still is concerned that college costs too much, and many people take the common sense view that federal student aid has played a major role in the growth of college tuition and other charges.

In the long run, the higher education community will be better served by taking responsible positions on this issue than by hoping it will go away.

Photo by John Harrington / Blackstar

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