By Richard Vedder
Jussi Keppo is a professor at the University of Michigan with a nice research record, publishing in prestigious journals like the Journal of Economy Theory and the Review of Economic Studies. He has been dabbling in higher education finance of late, to good effect (see his piece at seeking alpha).
Keppo includes some of the conventional variables in his model explaining rising tuition costs --government support of higher education, for example, and the college-high school earnings differential. But he also includes some financial variables relating to output-adjusted debt levels. He finds that the rise in debt has importantly helped fuel the tuition explosion, and that the current and anticipated future move to more conservative personal and business financing (lower debt loads, more personal saving, etc.) should work to reduce tuition increases.
Keppo's model is pretty simple, and certainly subject to criticism. Some findings are debatable. For example, has the expansion of Pell Grants over the years raised tuition fees? Singell and Stone think so, at least with regards to private four year schools. Keppo apparently does not,although he does not explicitly examine that question. Whatever the resolution of that issue, it does make sense that the student debt explosion occurring because of subsidized student loans has had to have some impact on tuition fees, and that impact may have been powerfully positive.
Andy (who brought this work to my attention) and I are intensively looking at higher education for an anticipated new book, and we sense that the law of unintended consequences is powerfully vindicated with respect to federal student aid, especially loans. You make it easier for students to borrow, and, indeed, encourage that borrowing, you then increase the demand for education. Given the nature of higher education and its somewhat perverse incentives systems for suppliers based on non-profit principles, supply has grown less rapidly, so the net effect of the loan programs has been to raise tuition fees. It is even arguable that there is a secondary effect that all of these aid programs on balance have made colleges more elitist than they otherwise would be (a subject for another day).
In any case, we welcome Keppo to the ranks of researchers on higher education and hope he continues to explore the issue of rising college costs.