The Higher and Higher Cost of Higher Ed

In a July 2015 report, the Federal Reserve Bank of New York observed a direct correlation between student borrowing and tuition levels, noting that “higher tuition costs raise loan demand, but loan supply .  .  . [relaxes] students’ funding constraints.” The Fed spoke of a “pass-through effect on tuition,” whereby for every dollar received in subsidized federal loans, tuition rises 65 cents. They report similar findings for Pell Grants (55 cents) and unsubsidized loans (30 cents). As the Fed study indicates, student debt isn’t rising simply because college is too expensive. Rather, school is too expensive because of rising student loans and grants. Research by economist Richard Vedder, director of the Center for College Affordability and Productivity, bolsters this argument. He found that “when someone other than the user is paying the bills, those bills tend to explode since the buyer is not sensitive to price.” In other words, the expansion of student loans and other third-party payments for college leads to higher prices by insulating students from the actual cost of tuition. This vicious cycle leaves many low-income students (who are supposed to benefit the most from financial aid) priced out of attending college.

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