July 10, 2015
Too often, the progressive response to an ever-increasing student loan burden on today’s young graduates is to make federal student aid easier to use, usually in the form of lower interest rates or more debt forgiveness. A new report from the Federal Reserve Bank of New York, by economists David Lucca, Taylor Nadauld, and Karen Shen, disputes this prescription. Rather than lightening the load on students, federal student aid programs actually increase tuition at America’s colleges and universities.
The paper concludes that each additional dollar of Pell Grants, awards given to low-income students to help them pay for college, increases tuition by 55 cents. Each dollar of Direct Subsidized Loans, or need-based loans for which the government pays the interest while students are in school, increases tuition by 65 cents. These effects vary by type of school, with the largest tuition increases found in private four-year institutions.
Importantly, the paper also finds that the “sticker price” of tuition translates at a high rate to how much students and their families end up paying. This rate ranges from 37 percent in the lowest quartile to 94 percent in the highest quartile—meaning students in the highest quartile will end up paying 94 cents on every dollar of tuition increases that are due to federal student aid. Federal student aid not only increases the price tag of a college education, but students actually have to pay for it, too...
Read the full article at the Manhattan Institute: Federal Student Aid Drives Up Tuition