Why more student loans = higher tuition

Former college administrator Peter Wood reveals in the Chronicle of Higher Education how raising tuition and fees had little connection to spending:

…The goal was to set the new prices as high as the market would bear without drawing too much adverse attention. … Few if any colleges and universities were content to raise tuition at the rate of inflation. The goal was not to stay even but to get ahead. How much higher than the CPI could a university go? The university president … would remind his administrative colleagues, “We don’t want to leave money sitting on the table.”

Startling enough, considering the usual justification that college officials give for price hikes — something Wood mentions in his article.

But he goes further, saying what the consequences that has when the federal government increases financial aid or otherwise makes college more affordable.

In short: It just fuels higher prices:

In college and university administrative offices across the country, people start to calculate just how high they will now be able to set new prices to capture these additional resources.

Sounds like what helped fuel the housing price bubble. From law professor Glenn Reynolds:

The buyers think what they’re buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

  • Anonymous

    This is a very perceptive article.

    “Government subsidies for most goods tend to spur increases in supply and bring new competitors to the marketplace, and thus work to reduce prices. But government subsidies in higher education seem only to increase prices.”

    “But benevolent motives aside, the system works very much like a treadmill. [The Red Queen Effect] No matter how fast we run, we stay in one place. Increasing student aid doesn’t make college more affordable; it just puts more resources in the hands of college administrators.”

    And this is EXACTLY what is going on at the U of Minnesota. Higher tuition does not go into better education, instead it goes into the infamous central administration “cost pools” and the educational quality actually decreases.

    Doubt it? See:

    “Her [Professor Martin] question is about the quality of the student experience: Students are paying a lot more than when President Bruininks started in office, and the assumption has been that quality of the experience would increase as well. Now they are hearing that the quality is eroding. How can the University play in the global village when its costs are increasing and the student experience is declining in quality?”

    “The problem is how the budget framework and state funding interfaces with the budget model; the cost pools are growing but there is no new revenue. If they raise tuition, a large part of the increase goes to central administration and cannot accommodate college needs.”

    Senate Committee on Finance and Planning
    Tuesday, September 21, 2010