Federal Reserve Blames Gov’t Aid for Driving up College Tuitions

A new study from the New York Federal Reserve faults the federal government’s policy of boosting aid to families in recent decades to make college education more affordable, because it enabled institutions to raise tuitions much faster than inflation.

In “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs,” the New York Fed makes the allegation that the federal government has fueled a vicious cycle of higher prices and government aid that ultimately could cost taxpayers and price some Americans out of higher education, similar to what many economists contend caused the housing bubble and bust.

The Fed’s David O. Lucca, Taylor Nadauld and Karen Shen calculated that annual student-loan disbursements–which include some private loans, but mostly come from the federal government—more than doubled between 2001 and 2012, to $120 billion. These loans allowed Americans to borrow at below-market rates with modest credit reviews and no assessment of the borrowers’ ability to repay. That explains why the average annual loan per student rose after inflation by 58 percent, to $5,777.

Federally-funded Pell grants to help low-income college students tripled to more than $30 billion a year, and education tax credits roughly quadrupled to about $20 billion a year from between 2001 and 2012.

The New York Fed found that a $1 increase in the federally subsidized student lending cap meant that tuitions rose by as much as 65 cents. The Fed noted that although Congress set limits on how much undergrads can borrow at $57,500 total, there are no limits on graduate students, who can borrow to cover any amount their schools charges through a decade-old program known as Grad PLUS.

This increasing federal government support for loans caused the inflationary cost of going to college to rise faster than any other category from 2000 to 2014, according to the Labor Department’s consumer-price index. Despite the consumer prices index climbing by only 2.4 percent per year during the period, college costs compounded by 6 percent.

The New York Fed in February reported that for the fourth quarter of 2014, the total amount of student loans substantially exceeded the amount of auto loans and credit card loans. Furthermore, student loan growth barely trailed mortgage lending expansion, and was growing by over 50 percent faster than autos and credit card loans.

The Fed did not break down what the tuitions ballooning faster than inflation were actually funding at the nation’s universities. But according to the Department of Education data, administrative positions at colleges and universities grew by 60 percent between 1993 and 2009, which Bloomberg News reported was 10 times faster than faculty growth.

At the California State University system, the total number of full-time faculty members grew from 11,614 to 12,019 between 1975 and 2008, but the total number of administrators grew from 3,800 to 12,183–a 221 percent increase, according to the New York Times.

The Federal Reserve is paying more attention to student barrowing after the St. Louis Federal Reserve published a report in April titled “Student Loan Delinquency: A Big Problem Getting Worse?.” The study revealed that the delinquency rate for the nearly $1.3 trillion in student loans has now ballooned to 27 percent.

A university degree was once perceived as the social elevator to a higher net worth, but the Federal Reserve Bank of New York estimates that 40 million Americans have racked up an average of four loans with an outstanding net balance of $29,000 to obtain a college education.