Do student loans raise the cost of college for everyone?

by Nick on February 28, 2012

Before we get too far into the post, let me emphasize that this blog is not about politics (mostly because I know even less about politics than everything else I babble about here…).  But this topic is arguably political in nature.  So I’ll try and focus on money and college issues here… feel free to get political in the comments, but make sure you’re nice to each other… or else!

I’ve been preaching a lot lately (and getting some nice hate mail) about avoiding student loans if at all possible.  Most of the reasons I beg people to avoid student loans are that people rarely think before borrowing, a bunch of people never graduate and get stuck with loans, people’s interests and majors change along with their expected salaries and, to a certain extent, it teaches the “buy now, pay later” mentality. 

But two recent studies suggest that something I’ve claimed for years might just be true:  that student loans actually make college more expensive

I know, I know…I’ve trashed “studies” a bunch lately, so I should probably trash these too because I’m sure they’re not perfect.  But these support something I’ve suspected for years, so they’ll get a pass, haha!  It’s my blog after all…  Seriously though, the point of the post has little to do with the study (even though it supports my theory…).  I just want to throw the question out there for you and see what we all think.  So here you go:

Do student loans make college more expensive for everyone?

The studies highlighted in the article suggest a couple of things.  First, some colleges reduce their own aid in response to increased federal aid.  Second, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuition.  Hmmm… sounds a lot like the housing market fueled by easy borrowing doesn’t it…

So is this the next bubble as some experts suggest?  I’m not sure, but I think there is definitely something to the theory.  To elaborate more on the housing bubble comparison, most people agree that the low interest rates (including “creative” financing like aggressive sub-prime adjustable rate and negative amortizing loans) and “relaxed lending standards” caused demand and prices for housing to go … ahem … through the roof (pun intended).  Why couldn’t the same thing be happening with college and student loans? 

If you were running a business and the government gave or lent people more and more money to encourage them to buy your product, wouldn’t you at least stop discounting your price as much?  And as demand increased wouldn’t you raise your prices to the point where the price minus the government aid results in reaching capacity at the highest price possible?  It’s natural. 

To continue the theory, the more government money available, the higher the prices will go.  And they will only stop when the net out of pocket cost is so high that people stop showing up.  (I use net out of pocket cost instead of net cost because the loans are a “cost” but they don’t require payments during school… you know… the entire point of my rants…)

So what do you think?  Do student loans cause college costs to be raised across the board?  And if you’re feeling especially daring, what could or should be done about it?

Until next time, put your credit card down and slowly step away from the mall!

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{ 21 comments… read them below or add one }

addvodka February 28, 2012 at 2:47 pm

I didn't get student loans (not government ones, anyway), so I'm definitely not an advocate of them.
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trokenmatt February 28, 2012 at 3:24 pm

Doesn't your premise ignore the competitive marketplace colleges participate in. Colleges compete for students and their money. Prospective students make decisions based on a lot of factors, including tuition costs among them. I'm sure some colleges try to compete more on price and others choose to compete by offering access to more famous faculty and others by looking the other way on keg parties. But overall, given the number of colleges in this country, there must be real competition taking place and so prices should be competitive.


Kooz February 28, 2012 at 3:52 pm

It may not be the next bubble, but it is a bubble.

@trokenmatt – All 4-year colleges turn away more students than they accept, which suggests that there isn't a market effect being seen, no?
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I Am 1 Percent February 28, 2012 at 5:30 pm

You're exactly right. There is a HIGH barrier to entry in terms of meeting the artificial demand for colleges. In other words, you can't just open up a college tomorrow. This is why the supply of colleges will not increase, why students turn away students, and why colleges can increase tuition.

Its sad to see the continued stupidity of the government in supply federal aid for college.

The other thing it does is not assess which majors are best. If you want a pottery major from Harvard, the government will pay for it. If loans were private, they would not fund this college degree.
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CreditSense-Recovery February 28, 2012 at 7:39 pm

I am a huge proponent of an educated society. We need smart people to start procreating or pretty soon we will all be sitting around contemplating "if that's a mole or a tick" instead of progressing as a society. (I could really go on a tangent here, but since it's my first post, I don't want to offend anyone. But… if all the High IQ people in our country keep chasing the American dream and put off having kids, and all the Low IQ people keep popping out kids… see where I'm going?)

Anyway… I believe there is a balance in Government assistance and private funding (like I did, working to pay for my tuition). I really like the direction "I am 1 percent" is going with the idea of qualifying loans based on majors. Subsidize areas of need rather than under water basket weaving. Although I hear there is starting to be a surge in the wicker market.


trokenmatt February 28, 2012 at 8:34 pm

Sorry Kooz, all 4-year colleges do not turn away more students than they accept. With a very quick search, I found this:…. In 2004, 82% of 4-year colleges that accept more than 1000 students, accepted more than half of all applicants.


trokenmatt February 28, 2012 at 8:44 pm

Actually, there is no barrier to entry. The supply of colleges has little to do with the supply of spaces for new students. It is very easy for existing colleges (of which there are thousands) to add spaces for students. And most colleges don't turn away students for lack of space. I'm sure Harvard can pretty easily build another building and hire a few more teachers. Harvard has a low acceptance rate because it chooses to be selective.


tlpinspw February 28, 2012 at 11:51 pm

The price of tuition has far exceeded any other measure of inflation. If easy money is available, it leads to inflation does it not? I will concede that I am not an economist, but I do understand that the deck is stacked against those who incur student load debt. It is the only debt that bankruptcy doesn't give relief to.
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Financial Money Tips February 29, 2012 at 2:19 am

I do believe that student loans make the cost of higher education even more expensive. Therefore, i would never recommend getting into debt for college. Instead i would suggest getting into debt to build a passive income asset that will pay for your college education.
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Kari February 29, 2012 at 6:05 am

If students are willing to "pay" $50,000 a year to attend college, using student loans, the schools certainly won't say "No". Higher Education is a business and college administrators are in the game to make money. I know that sounds cynical, but it's true. As a good friend of my said, "Thank god for the rich kids, cause their parents are paying our scholarships". 😉
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Money Infant February 29, 2012 at 10:24 am

I have to agree that all the easy money has made it much easier for colleges to go along and raise their prices at an astounding rate. It must be a recent thing though because I know that when I went to college I was unable to qualify for any loans. My parents made too much money, despite the fact that they were a one income family and my father worked in a factory. In the long run this was good since it stopped me from taking out any loans, but I still would have liked to go to Emerson rather than PSU.
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Nick March 2, 2012 at 3:08 am

I'm definitely "glass house" with this one. I only got government student loans… But it frustrates the crap out of me when people blindly sign tens of thousands of dollars worth of loans instead of considering another college or, God forbid, working a bit through school, haha!


Nick March 2, 2012 at 3:13 am

Now now guys! Haha! I love the spirited discussion (which is pretty typical every time trokenmatt stops by! I have seen recent stats that "some" colleges accept 100% but I still believe (admittedly on little data) that the availability of student loans with a low barrier of entry causes tuition to rise. It's happened in other areas many times (see: cash for clunkers, mortgages and the $8,000 first time home buyer credit for recent examples of people overspending because of government aid).

Given where we are, though, I'm afraid the solution will either be painful and/or possibly hurt select groups.

Great discussion though. I do think it's a bubble. Maybe it won't "burst" but there's no way we see 7.5% tuition inflation for the next 20 years. I just don't see it.


Nick March 2, 2012 at 3:15 am

haha, I obviously agree with Iam1percent based on the post. I do agree that Harvard in the short term could build a new building, etc., but that could or would diminish Harvard over the long term, so that's not really likely. I completely agree with evaluating college and majors on a value basis. There are some things in life where degrees are not worth it. Maybe charge different rates for different majors… what do you think of that trokenmatt?


Nick March 2, 2012 at 3:17 am

I think we're on the same page with subsidizing areas of need versus flat subsidies across majors. Have you ever seen the movie Idiocracy? It's one of the worst movies ever IMO but is premised on all the "smart" people waiting too long to have kids and the "other" people popping kids out like bags of popcorn… If you want to waste 90 minutes or so, check it out.


Nick March 2, 2012 at 3:18 am

I'm not an economist either but totally agree – sometimes all you need is logic! And the only way to get out of student loans is complete disability or death. Other than that, get your checkbook ready…


Nick March 2, 2012 at 3:20 am

I wish someone told me that before I signed up for the student loans. And I worked through college and could have paid my way through. If I were doing it again I'd just pay my way through.Interesting take on "if you're going to incur debt, do it for something to put money in your picket and use that money to pay for school." People could certainly do that if they're dead set on debt and the risk that goes along with it.


Nick March 2, 2012 at 3:22 am

Haha! Yep. I don't fault the schools for raising tuition. They're for-profit institutions designed to make money. I wonder if the govnerment realizes that they're mostly helping the colleges, not the students…at least not students as a whole…


Nick March 2, 2012 at 3:24 am

Yeah, I suspect around that time it started getting easier and that's what brought the 7.5% inflation over the last number of years. But you're right – you did what people SHOULD do – chose a school that allowed you to comfortably pay cash and come out on more solid ground. Great stuff.


tlpinspw March 2, 2012 at 4:24 am

The scary thing is I have a teen age child…wondering just how high tuition will be when (if) they head to college.
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Adam Lawrence January 6, 2013 at 10:00 pm

Yes, I think that student loans do raise the cost of college for everyone. If the government didn’t back every student, colleges couldn’t charge as much as they do because nobody could afford it. Without loans students would work their way through college and the tuition would be much more affordable. The costs are skyrocketing because of the guaranteed payments.


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