More Subsidized Federal Student Loans => Higher Tuition

The Federal Reserve Bank of NY has a study on the effect of increasing student loan availability on tuition.  The key sentence is in bold:

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 equilibrium tuition costs—for example, by relaxing students’ funding constraints. To resolve this simultaneity problem, we exploit detailed student-level financial data and changes in federal student aid programs to identify the impact of increased student loan funding on tuition. We find that 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. We also find that Pell Grant aid and the unsubsidized federal loan program have pass-through effects on tuition, although these are economically and statistically not as strong. The subsidized loan effect on tuition is most pronounced for expensive, private institutions that are somewhat, but not among the most, selective.

If I understand this correctly, they are saying that policy change that result in $3 of additional subsidized borrowing capability by students leads to $2 in tuition increases.   Talk about running in place!

Hat tip to Neal McCluskey of Cato, who has links to many more studies with similar results.

  • Matthew Slyfield

    Three steps forward, two steps back.

  • randian

    It should be obvious to any thinking person that the value of subsidies always accrues to the seller of a good or service, not the buyer.

  • Nimrod

    Though trickle down economics has failed (to bring about a communist equal outcome utopia), trickle up economics seems to be working great (for enriching select institutions).

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  • Danniella Cloud

    Thanx for sharing. It's a very useful information. I am a student and I recently I took a loan so now I need to make a plan for the future. I have already found helpful advices here http://www.basicfinancialtips.com . I hope in the future when I will have a good salary I repay it quickly.