Why Is College So Expensive? The Loan Dollar Debate

Starting in 2007, a college freshman could borrow $875 more a year from the federal government. The law was about loan limits, not tuition prices. So why did an analyst on a University of Phoenix earnings call ask about a 10 percent price increase? This video follows one question through three decades: when Washington lets students borrow more, where does the extra dollar end up? It lays out the Bennett hypothesis from 1987, the 1992 loosening of loan rules, the 2007 loan-limit increase, and the Federal Reserve Bank of New York study that estimated about 60 cents of each extra subsidized-loan dollar showed up in sticker tuition. It also lays out the competing explanations, because economists still disagree about how much of that is cause and how much is something else. This is an explainer about how a system works. It is not advice about borrowing, saving, or choosing a school. What this covers: What William Bennett argued in his 1987 New York Times column How the 1992 law opened unsubsidized loans to every student The 2007 and 2008 loan-limit increases and why they made a comparison possible What a University of Phoenix executive said about pricing on earnings calls The roughly 60 cents estimate for subsidized loans and its stated limits The state funding, cost and building explanations that other researchers and policy groups point to The story behind the thing. Narration is computer-generated (text-to-speech); research, script and drawings are original. Wren S O U R C E S THE STUDY AND THE LOAN LIMITS David Lucca, Taylor Nadauld and Karen Shen, "Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs," Federal Reserve Bank of New York Staff Report 733 (July 2015, revised February 2017; published in the Review of Financial Studies, 2019): the 2007 and 2008 loan-limit increases, the pass-through of about 60 cents per dollar of subsidized limit, the pricier-degree, private and two-year results, the authors' illustrative seat-capacity model, the grant finding, the Apollo earnings call quotes, the 46 percent sticker tuition rise from 2001 to 2012, and the authors' own note that results for unsubsidized loans were less robust. The unsubsidized estimate is not stated in the video because published and working-paper figures differ. Arithmetic is mine: $3,500 minus $2,625 is $875. Federal Reserve Bank of New York Staff Reports: https://www.newyorkfed.org/research/s... THE BENNETT HYPOTHESIS AND EARLIER EVIDENCE Saving for College, "History of Student Loans: The Bennett Hypothesis": Bennett's 1987 column "Our Greedy Colleges," his 2013 restatement, and the 1998, 2001 and 2003 reports that found little or no support. Marketplace, "Does financial aid drive up tuition?" (December 14, 2016): the views of Sandy Baum and Taylor Nadauld, the caveats about sticker prices and the short period, and the other explanations (state cuts, administrative and health costs, building arms race). THE 1992 CHANGE NASFAA, summary of the 1992 Higher Education Amendments: unsubsidized loans regardless of need and removal of PLUS limits. Stanford News Service, February 1994: the aid director's remark that anybody can borrow now. National Center for Education Statistics, Quarterly vol. 6 no. 3: wider federal loan access in the 1990s. THE OTHER SIDE OF THE DEBATE Center on Budget and Policy Priorities, "State Higher Ed Cuts Largely Driving Recent Tuition Hikes": state funding cuts and the rise in four-year public sticker prices; the video says only "more than a quarter" because versions of the figure differ slightly. American Action Forum, quoted in that debate: tuition grows about 3 percent a year regardless of state spending. Jenna Robinson, 2017 testimony to the Senate HELP Committee: cites a review of 25 studies in which a majority found some effect of federal subsidies on prices. NOT CONFIRMED, LEFT OUT: the Singell and Stone (2007) and Cellini and Goldin (2014) figures, and any claim about state funding in constant dollars before 2008. The freshman in the pictures is a made-up illustration. #CollegeCosts #StudentLoans #Economics #MoneyExplained #TrueStory