$0.60 or $0.65, capturing most of the income generated from the loan. Colleges, not students, are the prime beneficiaries. Colleges have used much of their enhanced tuition revenues to finance expanding university bureaucracies – the era of big federal student loan lending is also the era of administrative bloat at America’s colleges. I have estimated that if tuition fees had risen after 1978 at the rate they were before that date, college fees today would be about one half of what they actually are – and people could finance their education much more easily without large borrowing. Second, the federal loan programs were hyped as a way of providing college access to low-income Americans. Yet the proportion of recent college graduates from the bottom quartile of the income distribution today is lower than in 1970 . High sticker prices for colleges have scared away low-income college prospects, more so than more affluent ones. Also, the big borrowers and beneficiaries of student loans are moderately to very affluent Americans getting advanced degrees. Why should the federal government subsidize someone getting an M.B.A. degree from Harvard who will make $150,000 or more annually after graduation? Federal student financial aid programs have contributed mightily to the huge tuition price inflation of modern times.
Why do we have these federal loan programs? Why, when Americans are on average richer than ever and have a high standard of living, do they depend on federal government help to finance college? More generally, have these programs worked as intended? The answer to that is a resounding “no.” There are at least nine problems with the programs. First and foremost, federal student financial aid programs have contributed mightily to the huge tuition price inflation of modern times. From the middle of the 19th century to 1978, tuition fees in the United States rose about 1% more each year than the overall rate of inflation... If prices generally rose 2%, then tuition fees would usually go up around 3%. Universities are labor-intensive institutions, and it was argued that universities cannot substitute cheap machines for increasingly expensive labor, explaining moderate college tuition price inflation. Moreover, since real incomes were going up 2% annually, the burden of financing college was still falling for most Americans. Since the massive expansion of the federal programs beginning in the late 1970s, however, colleges have felt they could raise fees aggressively – students can simply borrow more. Education Secretary Bill Bennett first observed this in a 1987 New York Times op-ed. Empirical work at the New York Federal Reserve Bank and the National Bureau of Economic Research suggests the Bennett Hypothesis is valid. The research says that for every $1 a student receives in new federal loans, schools raise their fees by
American Consequences
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