June 13, 2013

Student Loan Availability Impact on College Costs

Lately I've heard people stating the belief that the easy availability of student loans is a reason that college costs too much.   Some people will even claim that student loans are the 'primary' reason that college costs have gone up.   The logic is that if there wasn't such easy access to money from student loans then colleges wouldn't be able to charge as much.  I've seen someone claim that if student loans went away that tuition would "plummet".

I don't buy this argument.

Nobody at Harvard is saying : "Hey the Stafford loan limit is $9,500 a year for undergrads Freshmen so we ought to charge $38.480 for a years worth of tuition". 

Nobody at University of California concludes : "we ought to raise tuition 9% to gouge those students because they can get loans"

Student loans are just one way to pay for college.   Loans are usually paying a fraction of the total cost.   The average debt for undergrads in 2010 was around $25,250.    But thats only among the borrowers and about 40% of students graduate without any loans.   $25,250 is a lot of money but its not even close to maxing out the limits.   For government Stafford loans the limits for 4 years are $19,000 for subsidized and another $28,000 for unsubsidized.   The government is willing to loan out $47,000 in Stafford loans and the average debt in 2010 was $25,250.  If the evil universities are just maximizing their budgets based on loan availability then wouldn't they jack up tuition even further to tap that unused loan limit?

Student loan limits haven't changed much.   Finaid.org has a history of the limits for student loans.   The limit on subsidized Stafford loans hasn't changed since 2007 and the limits for unsubsidized loans haven't changed since 2008.   I don't see loan availability changing at all really.   People have always been able to get loans and very few people take out the maximum of loans.  If universities increased tuition because of student loans in some sort of exploitative money driven agenda then wouldn't the universities increase tuition to the point that students hit the limits of their loans?    And wouldn't student loan borrowing account for a larger portion of the money used to pay for college?

People argue that if students couldn't borrow money they couldn't pay the tuition.   Thats true for some students, though not all.  But lets say student loans didn't exist, then fewer students would go to college.   I'm sure some students would find funding elsewhere via private loans or working and saving more.   But in the end if student loans disappeared over night I'm sure college enrollment would drop some.   What happens to a large institution like a University with large overhead fixed costs when they get fewer customers?    Prices don't naturally go down.  Sure they would cut many professors to adjust to lower enrollment but all the other costs would be spread over fewer students.  You think its half as cheap to maintain the University of Texas campus with half as many students?  Nope. 

Loan availability doesn't increase costs for other goods or services

DO you hear anyone declaring how car loans are causing the cost of cars to skyrocket?   Nope.   Thats because car costs aren't going up drastically.   Yet car loans are quite common and quite easy to get.   If easy availability of loans caused prices to go up then shouldn't cars costs be going up as fast as student loans?   I don't see why not.   

Credit cards are a loan.   I can buy virtually anything I want with a credit card.     Credit cards are quite easy to get.  If loan availability results in higher prices then shouldn't the high availability of credit card debt lead to increased prices in virtually anything?    Again I don't see why not.

Credit availability is common for goods via car loans and any consumer item via credit cards.   Yet neither of those forms of debt seems to have any noticeable impact on the cost of goods.     If the idea that loan availability increased costs was true then it should hold for any kind of good or service, but clearly it does not.

If it has an impact its not that much

I don't believe that the student loan availability is a key driver in the costs of college in general.   But lets for a minute just assume the theory is right and public school deans are raising rates in relation to student loans.    Lets say its true.    How much impact could it have?    If you look at a public university generally something around 50-80% of their funding comes from government money between the state and federal level.   Tuition typically ends up around 20-40% of the university revenue.   If you look at the total undergraduate student aid then only about 38% of the aid students get is in the form of loans.    Student loans then only cover about 8-16% of the total cost of university funding.   Student loan dollars really play a minor role in the overall college funding picture.

For profit schools are the exception

Is someone at a for-profit university saying : "Hey students can get themselves almost $50,000 in government loans to go to college so lets charge about $15,000 a year and take advantage of that borrowing"?    Yes, actually,  I absolutely do think that for profit universities setup their cost structure to take advantage of government aid.   In fact when you look at for-profit universities in general often the vast majority of their revenue comes to them via student aid that the students obtain.    The  Bill Moyers site  says that "85 to 90 percent" of for-profit university revenue comes from student loans.  These universities typically charge tuition rates of around $14,000 to $15,000 on average according to the CollegeBoard.   Yet according to a Senate report they spend " an average of 22.4 percent of revenue went to marketing and recruiting, 19.4 percent to profits and 17.7 percent to instruction"   I definitely believe that for-profit universities exploit the availability of financial aid.   They very likely do set their tuition rates based on loan and federal grant availability.

Finaid has data about student loan borrowing from 2007-2008 and they compare public, non-profit and for-profit institutions.   96% of students in bachelors programs at for-profit universities borrow and the average debt for them was $32,909.   Thats significantly higher percent of students borrowing and borrowing larger amounts than either public or non-profit schools.

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