Taking a page from Charles Kindleberger’s research on the increase in credit’s effect on asset prices, David O. Lucca, Taylor Nadauld, and Karen Shen, researchers at the New York Federal Reserve Bank, have posted a paper putting a price on what increased student loan availability has done to college tuition levels. (Link at foot of article.)
This is a careful paper: the authors lay out concerns about their methodology, stress areas where they see weakness, and balance the whole thing against the benefits to our workers and to our nation of an increase in the share of workers with college degrees. Nonetheless, it is a sobering piece of work that should force a number of deep questions, and, one hopes, policy changes.
In opening the discussion the authors note that much study has been devoted in recent years to the relationship between cheap credit and the 2002-6 housing bubble, and point out that although student loans fund a capital investment, whether delineated broadly as an educated work force, or on an individual level, while mortgages fund an asset, credit is crucial to both, and both enjoy the support of government-sponsored programs.
Federal student aid programs are governed by the 1965 Higher Education Act (HEA), which outlined 6 mandates, the fourth, Title IV, authorizing financial aid to support access to post-secondary education through the Federal Pell Grants program and the Federal Direct Loan Program. The researchers looked at three amendments to HEA: the increase in subsidized loan caps in 2007-8 school year; in unsubsidized caps in the 2008-9 school year, and the gradual increase in Pell Grants between 2207-8 and 2010-11 to link changes in tuition following increases access to loan and grant funding.
Although changes in caps theoretically apply to all institutions, the percentage of students who meet the requirement to gain access to those funds is not evenly distributed, and the students at program caps, say those with funding needs larger than the maximum loans available before cap increases, are the ones most likely to take the loans. As of 2012, about 60% of post-secondary students attended four-year public universities, 29% not-for-private private liberal art colleges and research universities, and 11%, Title IV “less-than-two-year” for-profit outfits, largely vocation and specializing in technology, business, photography, and fashion, including cosmetology and hair styling. That last 11% receives more than 77% of their funding through Title IV, with the largest share of near-the-cap students.
Between 2001 and 2012 yearly student-loan initiations increased from $53 billion to $120 billion, and in recent years 90% of those initiations came through federal student aid programs. Over the same stretch, the average tuition “sticker” price in constant 2012 dollars rose from $6,950 to $10,200, or 46%. (The authors focus on sticker rather than net tuition because it is more readily available, and because of the effects of institutional grants and the like.)
The authors found, not surprisingly, that the institutions with most aid exposure before the cap increases underwent “disproportionate” increases in tuition around those changes. For subsidized loans the authors found that 70 cents of each newly available dollar was captured as a tuition increase, and that approximately 55 cents of each Pell Grant dollar was so captured. Highest pass-throughs took place in the more expensive four-year private institutions with “relatively high-income students but average selectivity.”
Regarding this they conclude:
From a welfare perspective, these estimates suggest that, while one would expect a student aid expansion to benefit its recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect.
But it was good for the stock market. On the for-profit front Lucca et al. found evidence of “large abnormal stock market responses for a portfolio of all publicly traded for-profit institutions,” following the passage of the aid increases that summed up to 10% across the segments. They also found that the average increase in the sticker price in these outfits averaged $180, but averaged $56 in the not-for-profit colleges and universities.
Here’s some food for thought via a severe example of tax dollars gone astray. Surely some of the for-profit outfits meet their stated goals, but Corinthian Colleges Inc. (CCI), the largest such for-profit network, was not among them. In April 2015, under Federal criminal investigation, Corinthian closed down its operations, and filed for bankruptcy in May. Charges include misleading students on their career options and Corinthian’s ability to place them following graduation, the graduation rates themselves, and loan issues. California Attorney General alleges CCI targeted single parents close to the poverty level via aggressive marketing. So that’s one place our tax dollars earmarked to increase access to post-secondary education have been. Note to for-profit educators: Don’t make promises you can’t keep.
But we can end on an encouraging note. As is often the case, the action is at the margin. In working to ascertain whether student debt expansion increased access to post-secondary education over the short-haul, the NY Fed researchers found that only the availability of Pell grants increases access. These grants go directly to low-income students, who are most likely to be on the enrollment margin. And although they also push up tuition, they do so at a lower rate than the loan-based increases.
If we’re serious about increasing access to college for those who want to attend, we’d be wise to funnel funds into grant programs that advance that goal, and to do so at the expense of outfits like CCI.
Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs