Federal Aid Is Likely Driving College Costs Up

Jillian Frost / August 11, 2014

Federal financial aid for higher education was supposed to grow the market, bring down costs and help families afford this critical step to financial security.

But a recent report finds the effort to provide educational assistance to students has turned into decades of unaccountable federal spending on higher education.

According to the report from the Center for College Affordability and Productivity, the federal student aid system “contributes to skyrocketing costs, finances a wasteful academic arms race, weakens academic standards, lowers educational opportunity, and worsens the underemployment/overinvestment problem.”

As authors Richard Vedder, Christopher Denhart, and Joseph Hartge explain:

“The most striking thing to observe is that, not only have tuition fees risen after adjusting for inflation, but the rate of increase is rising since 1978. Federal involvement in providing student financial assistance is also growing over time… Before 1978, increases in tuition fees after adjusting for overall inflation were roughly 1 percent a year. In the era of substantial federal student aid after 1978, inflation-adjusted tuition fee increases have ratcheted up to 3-4 percent a year.”

It’s not just students who feel this burden. Taxpayers currently shoulder nearly $90 billion of the $1 trillion dollars of student loan debt now in default. The CCAP report also details shortcomings on the part of the federal government to account for risk in making federal student loans:

“The federal student loan programs are fundamentally unique because any consideration of risk is largely ignored when deciding whether to make a loan… During the past 11 years, the number of seriously delinquent student loans has grown by about 15.41 percent per year on average, outpacing those loans that are merely delinquent (fewer than 90 days past due on payments) which averaged 13.54 percent annually. In other words, student loan debt is growing at an unsustainable pace.”

Moreover, the federal government’s current accounting practices largely fail to account for market risk, which means the costs to taxpayers of student loans probably are higher than estimated. Federal student loan programs fail to take into account students’ credit worthiness, major or whether the student has a co-signer, which means federal student loans probably cost the government money, rather than turn a profit as is often claimed. Fair-value accounting, which takes into account market risk, would be a far more accurate reflection of the cost of federal student loans.

Attempts to rein in college costs by expanding the Pay As You Earn Plan, as President Obama did, or allowing for the refinancing of student loans, as Sen. Elizabeth Warren, D-Mass., proposes, encourage further borrowing without creating pressure on colleges to limit spending and keep tuition reasonable.

The Dynamic Repayment Act of 2014, offered by Sens. Marco Rubio, R-Fla., and Mark Warner, D-Va., is little better. It would expand federal involvement in higher education by not only requiring “every borrower of a federal student loan to pay 10 percent of his monthly income upon graduation,” it would “garner those payments through paycheck withholding.” The withholding provision in particular would, as a recent report from The Heritage Foundation detailed, enshrine the federal government in lending.

As Congress prepares to reauthorize the Higher Education Act, a number of other bills have been introduced, the most promising of which is the Higher Education Reform and Opportunity Act (HERO) proposalfrom Sen. Mike Lee, R-Utah, and Rep. Ron DeSantis, R-Fla.

HERO would restructure higher education by decoupling federal financing from accreditation and allowing states to permit any entity to credential individual courses. This could help reduce college costs, decrease federal involvement in higher education and make for a more customized college experience for students who choose to attend.