Federal aid does nothing to curb skyrocketing student debt

One of the biggest challenges facing newly-appointed Secretary of Education Betsy DeVos will be tackling the issue of rising tuition and consequent rising student debt levels, with thousands of Americans defaulting on student loans every day. 

College tuition, in constant dollars, has risen from just $3,521 in 1980 across all institutions to $11,487 in 2014. This is more than a threefold increase in tuition, adjusting for inflation — faster even than the rate of increase in health care prices. 

{mosads}The rather typical reaction that we can expect from policymakers to address this issue will no doubt involve calls for a greater expansion in federal financing. The orthodox belief among policymakers is based on the assumption that increased federal student aid will alleviate rising tuition costs, thereby making college more affordable. 

Unfortunately, all of the data on the relationship between federal student aid and tuition tells a very different story. Since 1980, federal spending on student aid through loans and grants has exploded more than threefold in 2016 dollars, with federal aid doubling since 2000 alone. 

Rather than alleviate college tuition increases, greater federal funding seems to have gone hand-in-hand with increases in college tuition over time. Many studies on this subject actually find that increases in federal support for higher education leads to a significant increase in tuition and a decrease in institutional aid. 

Indeed, in a recent study by the Mercatus Center, Mark Warshawsky and Ross Marchand found that, “Federal financial support for students has led to (1) large percentage, in some cases approaching dollar-for-dollar, tuition (price) increases in the four-year public and private, nonprofit sectors; (2) modest increases in enrollment, consistent with constrained supply and increased demand; and (3) in some instances more selectivity of students by these institutions.

Another resultant effect of this drastic increase in tuition in recent years is rising student default rates. Data from the Federal Reserve Bank of New York consistently shows significant increases in student loan default rates in recent years. This burden is felt hardest by students from nontraditional backgrounds who end up with tens of thousands in debt repayments and few prospects of higher paying jobs after graduation. 

What’s more, the earnings difference ratio between high school graduates and university graduates over 25 in full-time work from 1991-2014 has remained relatively unchanged since 1991. So, whilst students are paying more in tuition every year to fund their college education, the value of being a degree holder is no greater today than it was 25 years ago. 

With almost 70 percent of high school graduates enrolling in college every year, this student debt crisis is only going to get worse. Further increases in federal aid may only be counterproductive. Ever-increasing tuition and student loan defaults should lead policymakers to question whether the dramatic increase in federal funding of higher education in recent years is having its desired effect. 

In order to remedy the problem, Warshawsky and Marchand suggest “a robust parallel system of on-the-job training, apprenticeships, and practical work experience.

“Changes in federal laws and regulations could encourage the creation of such a system,” Warshawsky and Marchand stated.

It’s too early to tell exactly what the direction of the new secretary of education will be on this issue, but it is important to keep these trends in mind when considering how best to tackle the student debt problem. 

Jack Salmon is a Washington, D.C.-based researcher focused on federal fiscal policy. Salmon holds an M.A. in political economy with specializations in macroeconomics and comparative economic analysis from King’s College London. 

The views expressed by contributors are their own and not the views of The Hill.