Study: Rising Cost of College Tuition Driven by Government Loans

A study published by the National Bureau of Economic Research found that nearly all of the increases in college tuition since 1987 can be explained by the increase in student loans made more available by government policy.

The paper, by a pair of professors from Indiana University and the University of Missouri, notes that tuition costs have gone up 87 percent between 1987 and 2010 (in constant 2010 dollars). The authors note that is significantly faster than the rate medical costs have increased.

Using a computer model to simulate the college tuition market, the authors found their model predicted a 106 percent increase in tuition, as compared to the 87 percent increase found in actual data. Of the 106 percent increase predicted by the model, 102 percent could be accounted for solely by the increases in student loans. In fact, when researchers removed the increases in government student loans from the model, the cost of tuition only rose 16 percent instead of 106 percent.

These results match a view of college tuition increases known as the Bennett Hypothesis, which is based on an argument made in a column published in 1987 by then-Secretary of Education Bill Bennett. Bennett wrote, “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.” That theory has been controversial, but the new research strongly supports the idea that loans are a major driver of tuition increases.

The authors of the new research do note that their model overestimates the rise in tuition (compared to real-world data) and therefore should be assumed to be an “upper bound for the Bennett hypothesis.”

Nevertheless, the study does suggest that government policy plays a significant role in creating a problem for which Democrats are now suggesting an even more extreme government intervention as the solution. Bernie Sanders is campaigning on a plan to offer free tuition at all public universities and to make loans even cheaper for private schools. Hillary Clinton also has a plan to spend $350 billion to make college “debt free.”