A new law provides a one year extension of low interest rates on federal college tuition loans–that is, until after the elections. But will this encourage colleges to raise tuition even higher? Can the taxpayers afford this? Why has the cost of a college degree skyrocketed over the past several decades?
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The New Legislation
With an eye on the upcoming November elections, Democrats and Republicans came together to pass legislation keeping interest on “Stafford” loans taken out as of July 1, 2012 at 3.4% interest for an additional year. The rate had been scheduled to double to 6.8%.
The break comes with some fine print, however. In a temporary provision lasting until July 1 of 2014, those taking these loans in 2012 and 2013 will not have an interest free period following graduation, although payment doesn’t have to begin for six months. Students enrolling in college without a high school diploma or a GED (except for those home schooled) enrolling in college for the first time are no longer eligible for federal student aid.
The break doesn’t apply to new loans, or to all borrowers. The measure will affect about 7.4 million students, who will save an estimated $1,000 each, unless tuition goes up in reflection of this alleged temporary “break.” According to PRWeb, “From 2000-01 to 2010-11, the total amount of financial aid awarded to students under Title IV of the Higher Education Act jumped from $64 billion to an estimated $169 billion, a 10-year increase of 164%.”
According to a Milliman Insight report, outstanding student loan debt in America is nearly a trillion dollars, which actually surpasses credit card debt. The study notes that from 2003 through 2011, this loan debt jumped from $50 billion to over $900 billion. During this period, seriously delinquent loans have climbed from 6% in 2003 to over 9% in 2011. The loans are not dischargeable, so bankruptcy is not an option for unemployed graduates who can’t pay back the loans due to a lack of jobs in our failing economy.
Excessive Tuition Costs
The loans are vital to achieving a college education due to the continuous, excessive and unjustified increases in tuition rates. A Pew Research Centersurvey revealed that among adults aged 18 to 34 who are not in school and do not have a bachelor’s degree, 48% say they can’t afford to go to college.
A 2003 analysis by Congress’s House Subcommittee on 21st Century Competitiveness outlines the tuition challenge:
“America’s higher education system is in crisis due to exploding college costs. Tuition increases are outpacing the rate of inflation, increases in family income, and even increases in state and federal financial aid…These cost increases are pricing students and families out of the college market…tuition increases have persisted regardless of circumstances…and have far outpaced inflation year after year, regardless of whether the economy has been stumbling or thriving…institutions of higher learning have continued disproportionately increasing prices.” Students graduate with an average of over $25,000 in educational debt, according to US News.
That conclusion is supported by the 2001 National Center for Education Statistics’s “Study of College Costs and Prices…” which concluded:
“In both the public and private not-for-profit sectors, average tuition charges increased at a faster rate than inflation…” A Center for College Affordability and Productivity Report blames wasteful spending and administrative costs for the excessive tuition charges, stating “It is not uncommon for schools to have more people working in an administrative capacity than serving as faculty members.”
The increase in tuition rates has been staggering. AP‘s Education specialistChristine Armario writes that “Between 1982 and 2007, tuition and fees increased 439% while the median family income rose [only] 147%, according to…the National Center for Public Policy & Higher Education. The price of in-state tuition at a public university has increased by more than 5% annually in the past 10 years. It jumped 15% between 2008 and 2010 alone.”
Student Loans
While politically popular, low interest federal student loans have their critics. Economics professor Richard Vedder recently wrote of his concerns in Imprimis:
“Federal student financial assistance programs are costly, inefficient, byzantine, and fail to serve their desired objectives. In a word, they are dysfunctional, among the worst of many bad federal programs…if financial institutions can lend to college students on credit cards and make car loans to college students in large numbers–which they do–there is no reason why they can’t also make student educational loans.”
Vedder stresses that unlike other loans, student loans are set by political, not market, forces. He notes that a 3.4% rate is, considering inflation, actually close to zero. He questions why the federal government should have a monopoly on this activity, and notes that on occasion the funds received are used for non-educational purposes.
Vedder also points to the example of an era before the current loan program took effect:
“In the 1950s and 1960s, before these programs were large, American higher education enjoyed a golden age. Enrollments were rising, lower-income access was growing, and American leadership in higher education was well established…the system flourished without these programs. Subsequently, massive growth in higher education has proved counterproductive.”
After 1965, according to a CATO study, the federal government provided increasingly large amounts of funding for college education. Between 1965 and 2007, “real federal spending…rose from $7.5 billion to an estimated $36.6 billion.”
The impact on the federal budget of Washington’s monopoly on college financial aid is a cause of deep concern for many observers.
“Because of highly irresponsible fiscal policies, the federal government borrows 30 or 40 percent of the money it currently spends, much of that from overseas. Thus we are incurring long-term obligations to foreigners to largely finance loans…” notes Vedder.
Do Colleges Raise Tuition Based on Federal Aid to Students?
There is significant evidence to maintain that federal loans themselves are at the least partially responsible for the extravagant increases in tuition.
Former U.S. Education Secretary William Bennett, in his 1987 NY Timesarticle, “Our Greedy Colleges,” noted that “Increases in financial aid…have enabled colleges and universities blithely to raise tuition, confident that federal loan subsidies would help cushion the increase…higher education is not underfunded. It is under-accountable and under-productive.”
A recent Atlantic magazine article, reviewing Bennett’s concept twenty five years after it was written, notes that “twenty five years of swelling tuition prices later, Bennett’s critique seems to have received a bipartisan stamp of approval.”
The 2006 study by Larry Singell and Joe Stone, published in Science Direct’s Economics of Education Review, notes that “Increases in Pell grants appear to be matched nearly one for one by increases in list (and net) tuition.”
A Heritage Foundation report concurs, concluding “the major reason for tuition inflation over the years is government involvement in the first place…federal subsidies insulate colleges from being remotely worried about spending money wisely or cutting costs.”
The February National Bureau of Economic Research study concluded that “institutions eligible to participate in federal student aid under Title IV of the Higher Education Act charge tuition that is about 75% higher than that charged by comparable institutions whose students cannot apply for federal financial aid…the dollar value of the premium is about equal to the amount of financial aid received by students…lending credence to the Bennett hypothesis that aid-eligible institutions raise tuition to maximize aid.”
Conclusion
There is a vicious cycle of excessive tuition based on the availability of taxpayer-supported loans, which in turn lead to further rate hikes. This is draining funds from students, their families, and other sectors of the economy. If the already over-indebted federal government is to responsibly continue the politically popular student loan program, colleges who seek to be eligible must be given stringent standards as to the tuition they may charge.