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Now Let's Try Real Student Aid Reform

August 2, 2013 in Economics

By Neal McCluskey

Neal McCluskey

The U.S. Senate and House have passed a student loan bill President Obama will almost certainly sign. Bipartisanship lives! But don’t get too excited. Heck, don’t get excited at all: The bill will only deliver minor tweaks to a system that needs elimination, not a screw or two turned a little harder.

The bill, which ties interest rates on federal student loans to 10-year Treasury notes, certainly makes more sense than having Congress arbitrarily set a rate. Student loan rates moving with overall interest rates — not stuck well above or below them — makes sense if you are trying to balance the government’s need for revenue with a desire to furnish loans more cheaply than students would otherwise be able to get them. For supporters of such programs, getting this should have been simple, which is why — despite significant fighting — it ultimately got done.

Federal student aid is largely self-defeating when it comes to prices, and likely hurts low-income people more than anyone else.”

The big problem is such programs should not be supported. If the evidence shows us anything, it is that federal student aid is largely self-defeating when it comes to prices, and likely hurts low-income people more than anyone else.

The price problem is easy to understand. Give everyone an extra dollar to buy a hot dog, and what will wiener vendors do? Raise their prices! Essentially the same thing has been happening in higher education for decades.

According to data from the College Board, the inflation-adjusted cost of tuition, fees, room, and board at private four-year colleges rose from $16,745 in the 1982-83 school year, to $39,518 in 2012-13, an increase of $22,773. At four-year public institutions, it rose from $7,510 to $17,860, a $10,350 leap.

How about aid? In 1982-83 year, the average full-time equivalent student received $3,802 in federal grants and loans. By 2012 that amount had risen to $13,552, a $9,750 leap that tracks closely with increases in overall prices, especially when considering much greater enrollment in cheaper public institutions. And those figures exclude aid such as work-study and tax credits.

Of course these figures don’t prove that aid fuels rampant inflation, but they certainly track with the basic logic that schools will raise their prices if they can get people to pay them. And there is a growing body of empirical research showing that colleges do, in fact, capture aid.

The true cost of aid, however, goes beyond just skyrocketing prices. Aid …read more

Source: OP-EDS

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