The College Cost Riddle

Congress has reached a one-year deal to keep interest rates on federal student loans from doubling for millions of Americans. Republicans and Democrats said all along they wanted a deal to happen, and so did we. It would have been arbitrary and unfair to double loan rates all at once, especially with interest rates in the private sector at record lows.

This should prompt debate on a critical question, though: Do low-cost, government-guaranteed loans drive tuition and fees higher? Would college be less expensive if loans weren't so cheap?

The research to date has not proved a causal connection between easy money and skyrocketing tuition. But that would be logical: When demand rises and supply does not, prices rise. Government-assisted loans boost the buying power of students, but the benefit to students is limited if those loans prompt college tuition to rise.

This much we know: Demand has risen. America invests billions of dollars in financial aid every year. Student loan debt has grown to exceed credit-card debt. Young lives are being forever altered by the burden of rising education costs.

In 1987, then-Secretary of Education William Bennett shook up the higher-education orthodoxy by asserting that government financial aid helped to push tuition higher. The "Bennett hypothesis" is invoked in media coverage and policy debates today.

It is difficult to isolate the effect of government-based aid, in part because there are so many higher education options and price points.

The balance sheets of Princeton and Harvard, with their huge donor-supported endowments, have little in common with those of the least-selective private schools. Public universities have raised tuition partly because their state support has plunged. For-profit schools such as Career Education and DeVry obtain a large share of their revenues from taxpayer-guaranteed loans — prompting criticism that for-profits use high-pressure sales tactics to lure students into taking on debt for programs that do little to advance their careers. Community colleges, whose students also are eligible for federal loans, struggle against budget constraints to provide some of the same technical training as for-profits at a fraction of the price.

Yet the nation's loan programs still work as if one size fits all.

Americans are willing to pay a high price for higher education, and often for good reason. On average, lifetime earnings for those with college degrees far exceed the earnings of those who don't have a degree.

But there's reason to suspect that tuition is artificially high, and that subsidies and guaranteed loans reduce the incentive for schools to keep costs down. President Barack Obama said in January that the government should withhold some aid from colleges that don't hold the line on costs.

Education Secretary Arne Duncan wants to see more transparency from schools. He argues that if students knew more about a school's net cost, graduation rates and the value of its degrees in the marketplace, they would make better decisions about borrowing to pay for education.

Some states are exploring alternative ways to finance an education. California, for example, might allow students to pay for their schooling by pledging a portion of their future earnings.

Congress, for now, has avoided a jolt for students with the deal on interest rates. It could help students in the long run make better decisions if it pushed for transparency by educators and a loan system based on genuine demand.


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