Credit Supply and the Rise in College Tuition

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from NCPA,

When students fund their education through loans, changes in student borrowing and tuition are interlinked. Higher tuition costs raise loan demand, but loan supply also affects tuition costs, according to a study from the Federal Reserve Bank of New York. Student loans, much like housing finance, are often originated through government-sponsored programs, and these originations have been growing at a very sharp pace.

– Yearly student loan originations grew from $53 billion to $120 billion between 2001 and 2012 occurring through federal student aid programs
– Average sticker tuition rose 46 percent between 2001 and 2012, from $6,950 to $10,200.

Exploding tuition costs and loan balances in recent years have similarly attracted much policy attention. Changes in aid caps occurred between 2008 and 2010 and affected about 25 percent of all subsidized borrowers. Institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65 percent

If students attending institutions that rely heavily on federal aid could only do so because of the existence of these aid programs, then joint increases in enrollments and per-student aid at these more-dependent institutions may have only taken place thanks to their existence. As a result, these institutions also experienced higher growth in sticker tuition, although these effects are not very significant.

From a welfare perspective, these estimates suggest that, while one would expect a student aid expansion to benefit recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect.

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