The Pricing of College Loans before and after The Intervention by Governments

Prices for college have shot up in the last decade and while government has not taken unprecedented action to aid students and make college availability, it is actually because this action to help students that college has become less available. Some may think that by aiding students with their payments, by providing loans, will make it easier to go to college and less expensive, yet this is not the case. Over the past years, however, studies have shown that as the loans for college increase, the tuition has increased also, making it less easy to go to college and making it less available for everyone. It’s not that the programs and loans aren't doing enough to make colleges affordable, therefore we need more, but that these tuition aids are actually making college more expensive therefore we need less. To find out why this is, we must look at college pricing both before and after government intervention in addition to the process itself.

The theory that government provided loans raise tuition was first publicized by William Bennett, a former secretary of education during the Reagan’s presidency. He presented his theory in an article titles “Our Greedy Colleges” (Matthews, 1). This is how the idea went. If one was to start with a college that was totally free without tuition or fees, and the government came and told students they could get $5,000 in college loans for their tuition, any college would be an idiot not to raise their tuition up to $5,000 and get money out of the situation. In other words, when government increases subsidies by a dollar, colleges will match that amount in raising college tuition. It’s free money for the colleges, there would be no reason not to raise tuition and reap the benefits. Therefore by offering loans to students the government isn’t giving money to students, but to universities.

Fortunately for status quo policy makers, most literature on this subject has been very wishy washy on specific evidence. In a 2001 study by the National Center for Education Statistics found no concrete evidence for bennett's statement, however it did not find any against it either. Two recent studies by the UC San Diego’s Nicholas Turner and Lesley Turner, however, showed that government financial aid for students causes spikes in tuition prices and that universities capture 16% of the Pell Grant value. University of Rochester’s Michael Rizzo and Cornell’s Ronald Ehrenberg found more evidence supporting bennett’s claim. They stated, “We find substantial evidence that increases in the generosity of the federal Pell grant program, access to subsidized loans and state need-based grant aid awards lead to increases in in-state tuition levels. However, we find no evidence that nonresident tuition is increased as a result of these programs.” (Matthews, 1). In experienced economists Michael McPherson and Morton Schapiro’s book, The Student Aid Game, it was found that public universities increase tuition in accordance with government loans but private schools do not. In contrast, Harvard economist Bridget Long says that government aid, specifically the HOPE scholarship, raises tuition in private schools. Finally, George Washington University’s Stephanie Cellini and Harvard’s Claudia Goldin found that increase in government subsidies match tuition one for one at colleges.

Friedrich Hayek, a famous economist and philosopher, once said that democracy is “peculiarly liable, if not guided by accepted common principles, to produce over-all results that nobody wanted.” (Wolfram, 1). According to the Cato Institute, a public policy research organization, when looking at the 2008 Higher Education Act, using basic economic theory derived that college tuition has heightened because of the aid this act has provided, an outcome “nobody wanted” (Wolfram, 1). This institute suggests that the reason for the varying in specific numbers and exact evidence, discussed in the last paragraph, is the result of the different types of programs and aid among the many colleges and the difference between the colleges themselves. Yet we can still see a trend. In most of these studies and articles they do state some change, even if the evidence is not concrete. Rare is it to find a article that states that government aid does not affect tuition at all, and if they do they neither have substantial evidence for their claims. So it is safe to assume that Bennett’s ideas are at some scale solid. Thus we know that loans increase tuition and that state governments and colleges receive a fraction of the benefit that is given to students.

In addition, Cato better explains the growth of tuition as it relates to government’s increasing of loans in more detail:

“There is evidence to suggest that the HEA has been a factor in rising tuition costs. Rising tuition costs then result in political pressure to expand the HEA and provide tax credits and deductions for higher education expenditures; this in turn increases tuition costs, which leads to further expansion of HEA and use of the tax code to affect taxpayer behavior.”

In other words, it is a vicious cycle. HEA raises tuition, and thus the government feels more pressure to increase student aid, and thus loans are increased that tuition with them. Indeed, we see loans increasing steadily over the years and college tuition with them. Perkins Loans rose from $892 million in 1993 to $1.263 billion in 2004. In the same year Federal Direct Student Loan Program and Federal Family Educational Loans went from $12.539 billion in 1993 to $52.197 billion. In accordance, College Board discovered that college costs began to increase faster than inflation in the 1980s, and this had continued to be the case for many years. From 2004–05, tuition rose 51 % at public colleges, and this trend has continued alongside the rise in loans over the years.

This brings up another issue. Although some students receive loans, some are not eligible for these aids. So as some students can afford the high tuition because of loans, many must struggle through the oppressing weight of high education cost and can not reap from the benefit. They can not receive any of the loans yet are undergoing the consequences these loans have ensued. This makes it harder for many to attend college and while some are being aided, many who could attend universities are being held back because of the aid being given to others.

As loans increase and college becomes more expensive, the reliance of students of the government increases. This may lead to an endangerment of our liberties, when the government lends money, the students are become a slave to their lender. Therefore a better solution to the need for student aid would be to not have the federal government institute this aid, but to allow the private sector and state government to help students. 40 years ago, Nobel Laureate Milton Friedman suggested a program that would allow students to give a portion of the earnings in return for assistance in paying for their tuition, which would make students in control of the aid they were receiving and would not increase tuition.

Alan Michael in his book, The Student Loan Scam, said:

“I found that I wasn’t alone: millions of other citizens were trapped just as I was. This is a crises that our country has never before had to face. In a very real sense, it threatens to subjugate large segments of our population, trapping citizens into a lifetime of debt at the cost of pursuits that could be far more beneficial to the nation’s interests.” (Michael, xi-xii)

This plan of the government to aid students in not working. It is not only not the federal government's job but the money used in this venture could be used in so many more helpful endeavors to fix our economy and country as a whole, which is drowning in debt. When government steps in to try to help students with payments, it will actually make college more expensive for everyone, decreasing the education of the American people and harming the society. This issue is a serious one, and should be looked at as such. The government should use the laissez faire approach; They must allow the people and private sector to handle this. Thus it will fix the problem of high tuition and student debt which has been harming our society and county for many years.