Federal Student Loans Increase Tuition, Not Enrollment

Loans up 126 percent from 2001-2012, tuition up 47 percent in same time frame

• July 15, 2015 5:00 am


The expansion of federal student loans has caused tuition prices to increase without increasing college enrollment numbers, according to a report from the Federal Reserve Bank of New York.

The report evaluated student financial data as well as federal student aid programs "to identify the impact of increased student loan funding on tuition."

According to the report, yearly student loan originations grew from $53 billion to $120 billion between 2001 and 2012, an increase of about 126 percent. During this time frame, average sticker-price tuition nearly doubled, rising from $6,950 to $10,200 in constant 2012 dollars.

The report found that for each dollar of federal aid applied, tuition increased as well.

"We find that each additional Pell Grant dollar to an institution leads to a roughly 55 cent increase in sticker price tuition," the report says. "For subsidized loans, we find a somewhat larger passthrough effect of about 70 percent."

In addition to raising prices, the report finds that increases in loans may not have a positive effect on enrollment numbers.

"Studying the effects of increased supply in aid on enrollments is important because expanding access to postsecondary education, especially to lower-income students, is one of the stated goals of the Title IV programs," the report says.

The bank’s statistical analysis found a correlation between Pell Grants and enrollment but not loans and enrollment.

"This would suggest that only grants, but not loans, raise enrollments," according to the report. The authors acknowledge that their analysis only measures short-run changes and that it "may take time for institutions to expand their capacity."

The report makes reference to a hypothesis put forth by William Bennett, the Reagan-era secretary of education. The so-called "Bennett Hypothesis" holds that "increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase."

Many have compared the market for postsecondary education to the housing market.

"From a finance perspective, the market for postsecondary education has shared several features with the housing market in the past few decades, despite the fact that student loans fund a capital investment while mortgages fund an asset," the report says.

"First, credit plays a key role in U.S. postsecondary education; student loans outstanding are now second only to mortgages as a household liability. Second, student loans, much like housing finance, are often originated through government-sponsored programs and these originations have been growing at a very sharp pace."