Question: Why Does College Cost So Much?
Chart showing rate of increase of college tuition and fees vs. inflation measure (PCE Price Index); from Bloomberg:
According to the Federal Reserve of New York in a recent research report:
When students fund their education through loans, changes in student borrowing and tuition are interlinked. Higher tuition costs raise loan demand, but loan supply also affects equilibrium tuition costs—for example, by relaxing students’ funding constraints. To resolve this simultaneity problem, we exploit detailed student-level financial data and changes in federal student aid programs to identify the impact of increased student loan funding on tuition. We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65 percent.
The report is quite timely as average student debt levels (for the 70% of graduates who borrow) are close to (or exceed) the maximum federal student loan limits. At some point, there will be pressure to increase federal loan limits and by drawing a link between loan supply and tuition increases, this research may make that a more challenging proposition.
Check out this NGPF Activity that helps students understand the difference between sticker and net prices for college.
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.