Does increasing federal aid cause college costs to rise?

by Grace

Some analysis and commentary on the idea that increasing federal aid causes college costs to rise

Cheap Student Loans Are Awesome and a No-Brainer (Ohhh Yeahhhh) (The Atlantic, Derek Thompson)

Even if student loans are a reasonable investment for government to make, it’s equally reasonable to wonder whether subsidizing college is responsible for higher college costs. As James Surowiecki has written eloquently, tuition is rising for reasons that have nothing to do with Stafford loans. But as Jordan Weissmann has written for us, the economic literature found that funneling money to middle class students has contributed to college costs rising even more than they would have without loans. The evidence is mixed.

Are we subsidizing student debt too generously? (Washington Post)

Yes, federal subsidies do drive up tuition. It’s Econ 101: basic economics dictates that conclusion.  —  Hans Bader, senior attorney and counsel for special projects at the Competitive Enterprise Institute

Why They Seem to Rise Together: Federal Aid and College Tuition (Minding The Campus)

Richard Vedder:

Andrew Gillen masterfully demonstrates that Bill Bennett is right–federal financial aid programs lead to higher tuition. The implications of this and related financial aid effects are profound:

1. The intended income transfers from taxpayers (and, increasingly bondholders) to students have been largely diverted to college coffers; swelling payrolls and leading to armies of new university bureaucrats, million-dollar college presidents, an academic arms race and other pathologies;

2. This, in turn, has thwarted university productivity growth and helps explain why higher education is vastly more expensive than in most other major developed countries;

3. The goal of helping low-income students has not been met, and a lower percent of recent college graduates come from less affluent students than was true in 1970 when Pell Grants did not exist;

4. To the extent that these aid programs have increased enrollments (read Gillen), they have added to the growing disconnect between labor-market realities and student job expectations, creating armies of college graduates who are bartenders, taxi drivers, etc.

5. Enrollment increases, in turn, have contributed to a dumbing down of higher education and to declining standards.

What to do? The federal government needs to wind down its financial aid commitment. Restrict eligibility for aid to truly low-income students. Impose performance criteria for aid recipients: mediocre students will lose aid. Make the college absorb some of the risk for loan defaults–a lesson we should have learned from the financial crisis. Give Pell Grants as vouchers directly to students, not schools. Reinstate private lending options. Unveil new human capital contract approaches that reduce debt reliance. Downsize and reinvent federal programs and allow market discipline to operate more.

All these recommendations are worth considering.

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