Economics of Liberty

Student Loans Drive Up Tuition

Government intervention into the student loan business is making college more expensive.

A new paper by the National Bureau of Economic Research found evidence that increasing college costs is largely due to student loan policies. Authored by Grey Gordon and Aaron Hedlund, the study used a computer model to measure the effects of different economic forces on college prices. Nothing, they found, jacked it up, like college loans.

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


The paper backs up the “Bennett Hypothesis” (named after President Reagan’s Education Secretary William Bennett), who proposed that increasing student aid leads to colleges increasing prices. They also claim that it provides the reasoning for why college costs increased from 1987 to 2010.

They write:

“Existing theories can fully explain the increase in net tuition between 1987 and 2010. Our model suggests demand-side theories have the most predictive power. In fact, our results show the Bennett hypothesis can fully account for the tuition increase on its own.”

Now, to be fair, a George Mason University economist says that the study’s findings seem to be very favorable towards the Bennett Hypothesis. However, he writes, “Some of these results appear too large to me” and reminds us that, “the authors caution that they need to assume a lot of monopoly power to solve their model so the results should be taken as an upper bound.

“Nevertheless,” he concludes, “the Econ 101 insight that subsidies increase prices (even net for those who are not fully subsidized) holds true.”

Another study, published in July of 2015 by the New York Federal Reserve, reached a similar conclusion regarding loans and tuition. That study found that the schools which benefited most from government intervention into student loans were private universities, not public universities, and that such a dynamic is leading to greater educational inequality.

If government keeps involving itself in the student loan business, prices will continue to rise, as colleges will have no incentive to lower prices. Some liberals want greater government or even “free” public universities (like presidential candidate Bernie Sanders). But this will devalue college degrees and result in a myriad of economic consequences. In fact, Denmark’s economy is suffering from such consequences.

Related: The Perils of Student Loan Debt 

Does government intervention make college more affordable? The federal student loan bill stands at $1.2 trillion and is expected to double in the next ten years.

The average student loan debt has tripled in twenty years from $10,000 to $35,000 per student.

This is the debate which we need to have. How do we make college more affordable? Should the government do anything at all? What we don’t need is someone like Bernie Sanders who doesn’t know the basics of borrowing and collateral telling us what he thinks of housing and student loans.

Perhaps its time we stop subsidizing tuition and watch colleges and universities actually compete for business.

Related posts

; })();