Loans Don’t Help Students; They Make College More Expensive

Whenever there is an economic transaction, two parties have to come to an agreement. The buyer must offer enough money to get the seller to produce and supply the good or service. The seller must be willing to accept an amount of money that the seller is willing to pay.

It is often thought that sellers of “valuable” goods can demand any price they want, but that isn’t always true. Food and water are of the utmost importance to human beings. They need both to live. Yet food and drink are relatively cheap.

So why has tuition for college become so expensive?Reason magazine reports, “New Study: The Main Thing Making College Crazy Expensive Is Student Loans.”

A new paper from the National Bureau of Economic Research found yet more evidence for the notion that skyrocketing college tuition costs are the result of all-too-generous student loan policies.

The study, authored by Grey Gordon and Aaron Hedlund, used a computer model to measure the effects of various economic forces on college costs. According to the model, no factor had more to do with rising tuition prices than loan subsidies.

“Looking at individual factors, we find that expansions in borrowing limits drive 40% of the tuition jump and represent the single most important factor,” wrote the study’s authors.

In fact, the “Bennett hypothesis”—the idea, first proposed by President Ronald Reagan’s Education Secretary William Bennett, that increasing student aid encourages colleges to jack up prices—fully explains all the tuition increases between 1987 and 2010, according to the study.

If the seller knows that the buyer has a lot of money earmarked for his product he is going to demand a higher price. In this case, through government-subsidized loans, the government has made students “wealthier” for college. Naturally, the colleges jack up the price. Even though that money attracts the creation of new schools, they can’t be formed fast enough to cause the price to go down.

But now all these schools and their budgets are premised on the large student loans made possible by the government. If they don’t continue to expand, the industry will suffer an economic collapse.

That’s why, when politicians promise to increase student aid, they are not helping students but bailing out colleges.