Explosive New Study: Government’s Role In Increasing Tuition Costs

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College tuition is rapidly becoming what will be a lifelong burden for middle class college students thanks to the big government easy money loan program which has enabled colleges to simply raise tuition as costs increased instead of making the necessary cuts. A new study backs that up.

A bombshell study conducted by researchers for the Federal Reserve Bank of New York found that for every dollar in federally subsidized student loans, schools increased their rates by 65 cents. For federal Pell Grants and unsubsidized loans, schools increased their rates 55 cents, Fox News reported.

Schools are taking more than half the money from the students for every dollar they borrow, most especially in expensive four-year colleges.

Loans need to be tied to college tuition reforms because eventually this bubble will burst. Giving the money to students is not going to stop but colleges need to be brought into the loop.

If government loans are tied to the increase in rising college costs, what will happen when it’s free as has been suggested?

Easy money grants, with their high default rates, are government loans, both state and federal, hence taxpayers will shoulder the losses, while colleges can continue their unabated spending.

If students are unable to pay back their college loans, the college-bundled derivatives become the new bubble, and the costs will be placed squarely on the shoulders of the taxpayer.

Pell grants, the grandest of the grants, are an unsustainable tax burden.

There is something called the “Bennett Hypothesis,” a theory first put forward by William J. Bennett, who served as education secretary under the Reagan Administration. He maintained that ballooning federal aid does nothing but allow colleges and universities to raise the cost of tuition.

College officials know that students can borrow more money for college so they’ve come to rely on raising tuition to deal with their problems as opposed to looking for waste, fraud, or contractual changes for staff.

Lending for college has become profitable and risk-free. Increasing college costs means students must take out more loans, more loans mean more securities lenders can package and sell, more selling means lenders (now the government, backed by the U.S. taxpayer) can offer more loans to package and sell, more selling means lenders can offer more loans with the capital they’ve accrued, which means colleges can continue to raise costs.

The result is over $1.2 trillion in outstanding student debt with the federal government (the taxpayer) directly or indirectly on the hook for almost all of it.

Student loans have increased by 84% since the recession (from 2008 to 2014) and are the only type of consumer debt not decreasing, according to a study from Experian, which analyzed student loan trends from 2008 through 2014.

In May of 2014, unbelievably The Washington Post ran an article minimizing the trillion dollar plus bubble on the backs of taxpayers. Sure, it’s costly, it will get more costly, but students are better off with a college education and the reasons for the increase in college costs are complex.

Maybe they’re not that complex if we are to believe this study.

College costs are rising partly because of high salaries for reduced work loads of teaching staff.

The Atlantic cited one of the problems as time off for professors.

Faculty members are paid for their output in three areas: teaching, research and service (e.g. committee work and student advising). For many years, at schools where serious research was frequent and prolific, faculty members were granted reduced teaching loads in order to free up additional time for writing, lab work or creative endeavors. Over time, what was once a normative classroom load of 3 classes each semester (3 & 3), was reduced for scholars to 3 & 2, then 2 & 2, then 2 & 1 – to the ultimate extreme.

Soon this reduction became normative, regardless of the amount of research produced. “Good schools” had lower teaching loads than others.

[…]

Colleges award lifetime contracts to Professors on the basis of their publications and sometimes the published works are insignificant. Professors tend to stay too long with the benefits and short work days. Craig Carnaroli of the University of Pennsylvania said that “Over 50% of our budget goes to the people that we employ.” College professors now make an average of over $100,000 a year.  Penn’s president makes over $1 million.

The number of salaries at colleges has multiplied as well.

Staff salaries have increased because of the array of enrichment components that include head-counselors, cruise directors, personal physicians, trainers, tutors, student-life workers, alumni affairs, and so on.

USA Today reported that 23 Private College Presidents Made More Than $1 Million in 2008, while 110 made more than $500,000. By 2014, some college presidents were making well over $1 Million with some making over $3 Million.

All this is possible because of easy loan money.

New York Times article in 2009 reported that over the previous 20 years, colleges doubled their non-teaching staff, while enrollment had only increased by 40%.  Jobs included monitoring environmental sustainability or their focus was on student “lifestyle.”

Labor economist Daniel Bennett, who conducted this study, says “Universities and colleges are catering more to students, trying to make college a lifestyle, not just people getting an education.”

There are more social programs, more athletics, more trainers, more sustainable environmental programs.”  The student loan program made this possible.

Sports cost and not all big time sports are lucrative. Football, for instance, often brings in sufficient funds to cover the expenses, but 29% suffer a loss. Another problem is that many athletes cannot make the grade academically, but the NCAA now requires Division I universities to go through a selection process every ten years which makes universities more accountable for their players’ academic performance.

Spending on luxury dorms, gyms, swimming pools and other amenities has become a necessity to lure students.

Freakonomics author Stephen Dubner said that the chancellor of his alma mater told him that  “[the gym] was a top priority because parents and prospective students increasingly think of themselves as customers, shopping for the most amenities for the best price, and the colleges that didn’t come to grips with this would soon see their customers going elsewhere.”

But gyms are nothing.  In 2008, High Point University in North Carolina announced that students were treated to valet parking, live music in the cafeteria and Starbucks gift cards on their birthdays.

Colleges generally operate on two 14-week semesters and summer school, which amounts to a 50% utilization rate. Classrooms, libraries, labs sit idle for the other 50%. There’s room for improvement here.

The colleges spend billions to advertise, lobby and make campaign contributions.

For example, the University of Phoenix, a for-profit college, has an exclusive partnership with GOOD magazine, sponsoring an education editor, and they spent $9 million on lobbying and campaign contributions in 2010 alone. The for-profits are becoming the fastest growing sector in our college level programs.

Bloomberg reported in 2010 that publicly traded higher education companies relied on three-fourths of their revenue from federal funds, an increase of about 48% since 2001 and currently approaching the 90% limit set by federal law. In other words, colleges rely on borrowed money to finance their schools up to the legal limit.

The non-profits suffer from the same problem. For-profits account for less than half of student loan defaults. Nor is the issue one of “good colleges” vs. “bad colleges.” As one New York Times article illustrates, even students at prestigious non-profit schools like NYU can find themselves in financially ruinous circumstances because of their student loans.

Obama’s solution was to shift the entire burden of college loans to the taxpayer with his Income Based Repayment, which ties the size of student loan payments to the borrower’s income. It did nothing about the core problem.

IBR allows borrowers to pay out no more than 15% of their discretionary income, per month, to the loan. The U.S. also forgives whatever hasn’t been paid off in 25 years. The IBR cap will drop to 10% of discretionary income.

Government is driving up the cost of education with government loans and at the same time sending the message that everyone must go to college. He wants to make college free!

In the United States, there is a status-driven approach to a career but not everyone should go to college. We also need to rethink the college loan program and its connection to irresponsible and wanton increases in tuition.

1 COMMENT

  1. Something is terribly, terribly wrong with and in our secondary schools spending. I have a faded article from late Summer 1967, where the Chancellor of Indiana University, Bloomington, Indiana stated that a student entering college could expect the cost of tuition, dorm and meals, books would cost them $11,000 for ALL FOUR YEARS.

    I suspicion much of it is inflation. Inflation is the government printing too much money. Nothing else. It has nothing to do with supply and demand free market principles.

    The whole mess is daunting. I see the loss of good paying hourly wage jobs, and a willingness to be dependent on the national government for all sorts of stuff to be problem. I see no end of it either.

    Heck, I muddled through all most of it for decades, made some good money towards the end of my career, and worked my butt off to get there. I paid more much more than my fair share of taxes. I was too busy trying to provide for my family to realize how badly I was getting screwed by taxation. Now, I see little hope for the vast majority of Americans, unless they wake up out of their stupor, get off their collective asses, and start throwing the weasels out of office, and quit the cradle to grave concept of government whether it be national, state, or local level.

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