Over the last decade, college tuition has risen over 40 percent across the board. With such a drastic increase in tuition, many students have turned to the government to subsidize their education costs. However, with the total amount of American student loan debt now surpassing the total amount of American credit card debt, there can be no denying that there is something seriously wrong with our system of higher education.
While many economists, politicians, and pundits tailor the origins of the higher education crisis to meet whatever ends they are endorsing, there have been multiple opinions offered as to why tuition continues to rise and why student loan debt seems almost impossible to pay off.
Recently, Refinery29 released a video which claims to explain the tuition hike and student loan debt crisis currently afflicting our country. However, the video fails to tell the entire story, specifically neglecting to place blame on one of the biggest contributors to the rise of college tuition; the federal government.
The video claims that federal and state funding for higher education has steadily decreased since 2008, which has resulted in rising tuition costs. As colleges attempt to financially survive without the additional government subsidies, they are left with no choice but to raise tuition. However, this claim is completely untrue.
Traditionally, states have spent more on higher education than the federal government. In fact, in the years leading up to 2012, states outspent the federal government by 65 percent when it came to higher education. However, in the last decade, this trend has changed dramatically.
Before explaining why state funding has been outspent by federal funding, it is important to understand the difference between state and federal funding. Traditionally, state funds allocated to higher education purposes go towards supporting specific public institutions, like a state or community college. Federal funding, on the other hand, tends to go directly to the student through Pell Grants or student loans.
According to a report released by the Pew Charitable Trusts in June 2015, federal funding surpassed state funding as the main source of public support for higher education in 2010. This was also the same year when the number of Pell Grants awarded to lower income students reached an all-time high, amounting to $36 billion.
The Pew Charitable Trust report also takes a closer look at Pell Grant funding in the five years leading up to 2013. Though Refinery29 claims that both federal and state funding began decreasing in 2008, this appears to be incorrect. In actuality, Pell Grants, which are funded through federal subsidies, actually increased by 72 percent since 2008.
Despite the claim that government funding has been dramatically reduced over the years, the actual numbers tell a much different story. As government money continues to flow freely into colleges and universities it is also important to understand why increased subsidies have resulted in higher tuition.
In July of 2015, the Federal Reserve released a report entitled, Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs, which found that government subsidies were responsible for rising tuition costs. The report states that:
“We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65 percent. We also find that Pell Grant aid and the unsubsidized federal loan program have pass-through effects on tuition.”
To put it simply, as Cato Institute economist Neal McCluskey did in April 2012,
“The basic problem is simple: Give everyone $100 to pay for higher education and colleges will raise their prices by $100, negating the value of the aid.”
In addition to the report released by the Federal Reserve, in September 2015, Grey Gordon and Aaron Hedlund conducted research for the National Bureau of Economic Research, which also sought to explain the rise in college tuition. In Hedlund and Gordon’s white paper, “Accounting for the Rise in College Tuition,” the duo found that government subsidies were causing tuition to rise, just as the Federal Reserve report showed.
“With all factors present, net tuition increases from $6,100 to $12,559. As column 4 demonstrates, the demand shocks — which consist mostly of changes in financial aid — account for the lion’s share of the higher tuition,” the Gordon and Hedlund paper states.
Though these are not the only inaccuracies presented in Refinery29’s video, they are by far the most concerning. In order to properly address the situation facing America’s higher education system, it is vital that we properly identify the causes that led to our current predicament. Without a clear understanding of why tuition costs continue to rise, we are doomed to continue this perpetual cycle of increased government subsidies resulting in increased tuition, and thus, higher loan amounts being borrowed.