Why Increased Access to Student Loans Is Mostly Just Good for Greedy Colleges

greedy colleges
For every $1 of increased access to federal student loans, the colleges capture 60% of it through tuition hikes, which pay for critical spending such as the “University of Phoenix” NFL stadium

A paper by the NY Fed that came out recently should embarrass our nation’s colleges and universities. The researchers found that whenever the federal government increases access to subsidized or unsubsidized student loans, colleges take away the majority of this extra help through tuition increases. For every $1 of extra aid intended to help needy students, universities take away 60 cents of it through increasing their tuition prices. Clearly, greedy colleges cannot keep their hands out of the federal student loan cookie jar. 

Private Colleges Are the Worst Offenders

Everyone knows that ITT Tech is a scam, but do people realize they are similarly be being ripped off by most any private college out there too? The paper finds that the effect of increasing tuition to capture most of the benefit for the college was worst at private colleges and universities. Instead of making college affordable, these colleges are doing the opposite!

When politicians stand on stage in front of a bunch of college students and promise to make college accessible for everyone, the extra credit they extend to the student loan market only drives up the cost of an education even more. If we cut off a lot of the easy money in the student loan sector right now, horrible for profit colleges would shut down, overpriced private universities would be forced to cut back, and maybe the University of New Hampshire wouldn’t spend $17,000 on a table again.

What this Means in Practice

Let’s say that Deandre goes to NYU. It’s a great school, but happens to be one of the most expensive undergrad institutions in the country. His family is rich enough that he doesn’t qualify for major need based scholarships but poor enough that his family cannot pay the cost of attendance each year. He takes out lots of subsidized and unsubsidized loans to pay for NYU.

The administrators at NYU successful convince Deandre and his fellow classmates that if only the government would increase access to subsidized student loans, they would save thousands of dollars in interest. Politicians who want to win the Millennial vote then pass legislation doing this. The administrators then turn around and take away 60% of the interest cost savings with a 5% tuition hike.

Effectively, the taxpayers efforts to make college affordable have backfired. Instead of limiting credit, which would result in families pushing back against greedy colleges, we have expanded it drastically. The result has been that private colleges cost 8 times more than they did a few decades ago. We also have a thriving for profit college sector that hands out degrees not worth a fraction of the expensive investment at an alarming rate.

Tuition Will Remain Out of Control Until We Contract the Availability of Student Loans

At the very least, I’d suggest outlawing for profit private colleges as recipients of federal student aid. I have no problem with these institutions existing. However, they should be funded completely by private employer tuition assistance programs, private student loans, and personal savings from students. If we instituted these restrictions, we would have a right sizing of the industry and many of the universities would go out of business.

Think about the fact that a significant portion of the federal subsidies that go to institutions like the University of Phoenix go to writing a check to the Arizona Cardinals for naming rights to their NFL stadium. That alone should show that there’s a big problem.

I’ve worked with many veterinarians who’ve taken advantage of my $100 student loan consulting service. They email me and tell me that their loan officers just helped them sign up for gobs of debt and told them a bunch of misleading statements about how easily they’d be able to pay it off. If we tightened down credit, it might result in fewer veterinarians, but it would definitely result in cheaper cost of attendance. I believe that’s what we really need right now in education.

Be cautious when your loan officer wants to sign you up for big piles of student debt. Consider alternative financing methods such as attending junior college first, going to a public flagship university, joining ROTC, working a part time job, or going to a less prestigious school for a better scholarship. You will experience more freedom in life and have more options in the workforce.

Questions for You
  1. Have you ever experienced colleges increasing the cost of attendance? How did it impact you?
  2. What is your opinion of federal student loan availability to for profit colleges like DeVry and ITT Tech?
  3. Do you feel like you would have not been able to go to college at all without student loans? Was the debt you incurred worth it?

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