Student Debt Bubble - part 1 - Federal Subsidies

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Surprisingly, increases to government spending have also contributed in some real ways to the rising sticker price of a college education. The vast majority of college students who have filed a FAFSA know there is a range of grants and loans available to cover their bills. And of course, these funds are indispensable for the tens of thousands of students who need them in order to attend school. That said, increased funding availability does lead to an increase in price; the more students are given to help pay for college, the more they are willing to spend, and consequently, the more colleges can charge.

A 2012 report by the College Board makes it very easy to see how dramatic rises in tuition mirror sharp increases in federal student aid. The government awarded just around $17 billion in total federal grants (including Pell, LEAP, military, and several others) in 2001. This amount exploded up to $49 billion by 2011. This makes for a 185% increase within a ten-year span.

A very similar trend occurred with federal loans, which jumped from a yearly total of around $47.8 billion to $105 billion over the same period. While enrollment in college-level degree programs rose during this time, graduation rates fell. And unsurprisingly, the number of for-profit secondary institutions also multiplied.

This is a tricky situation. We all agree that deserving students should be granted more, not less, access to higher education and no one wants schools to have to reduce their enrollments or the quality of the educations they offer due to falling budgets. But if we want to lower the burdens on students, schools and taxpayers, we need to focus on allocating federal student aid and loans in a way that isn’t accelerating rises in tuition costs.

So if both cutting and raising government funding makes the student debt situation worse, what is the solution? The question is not about raising or lowering spending, but rather how the money is spent. Heaping thousands of dollars in subsidized loans on young borrowers to cover exorbitant education costs is not the answer, but neither is cutting support for important academic research. It’s a complex equation, but until it’s figured out young graduates are going to be bearing a heavy financial burden.