NCPA - National Center for Policy Analysis

Student Loan Debt Shows High Cost of Federal Aid

November 1, 2011

When President Obama announced changes to rules on repaying college student loans, he said his goal was to ease the financial burden of getting a degree.  But if the history of college financial aid (and other government attempts to protect consumers from costs) is any guide, Obama's plan will likely backfire, says Investor's Business Daily.

  • Over the past three decades, financial aid has rocketed up 438 percent after inflation, says the College Board.
  • That's largely due to huge hikes in more than a dozen federal grant and loan programs.

"By providing aid and subsidized loans, the government is trying to protect students, but the effect is perverse," said Jane Shaw, president of the John W. Pope Center for Higher Education Policy.  "They increase demand and enable colleges to hike tuitions virtually without restraint."

  • An increase in the average student loan of $1 was associated with net tuition that's 93 cents higher at public schools and 55 cents higher at private schools, according to Andrew Gillen of the Center for College Affordability and Productivity.
  • A 2007 study by University of Oregon economists concluded that colleges "tend to absorb most federal student aid by increasing their tuition revenue."
  • That doesn't necessarily mean students are getting a better education -- from 1993 to 2007, per-student spending on administration climbed twice as fast as spending on instruction, a Goldwater Institute study found.

The same phenomenon has occurred in health care, where government for decades has worked to shield consumers from direct costs, fueling health care cost inflation by encouraging demand and giving doctors and hospitals greater license to raise prices.  Indeed, consumers now pay just 12 percent of the nation's health care tab out of pocket versus nearly half in 1960, fueling much of the nation's health care inflationary spiral.

"Providers aren't competing for business based on price," said John Goodman, president of the National Center for Policy Analysis.  "And if they're not competing on price, they have no reason to lower cost."

Source: John Merline, "Student Loan Debt Shows High Cost of Federal Aid," Investor's Business Daily, October 28, 2011.

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