Chart of the Week: Grants and Loans by Class Level

For today's Chart of the Week, we take a look at undergraduate grant aid and loans (for 2008) by undergraduate class level, as reported in the Dept. of Ed's Data Analysis System. As this chart shows, the average freshman and sophomore receive the lowest amount of grant aid but also take out, on average, smaller loans than upperclassmen. While juniors and fourth year seniors receive the most generous grant aid, fifth year seniors have the greatest disparity between the grant aid they receive and the loans they take out, suggesting that fifth year seniors rely more heavily upon loans for financing college than other undergraduate students.

'A Crazy Quilt of Discounting'

by Jonathan Robe

Mark Schneider had a rather good (though short) post Tuesday over at the The Enterprise Blog in which he noted that the rise in college tuition from the 2007-08 to 2009-10 academic years was roughly three times higher than inflation as measured by the CPI. This observation is not, it goes without saying, a new one. After all, historically, annual rates of increase in college tuition have routinely outpaced (even quite substantially so) the annual rates of increase in the CPI (see Table 1-1 of Going Broke by Degree, for data on the 1979-2003 period).

What's even more interesting (and disturbing), though, is that since the start of the recent recession (during a time when household incomes experienced a sharp decline), the annual rate of increase in college tuition slowed only slightly: growth went from 6.4% in 2007 to 6.3% in 2008 to 5.9% in 2009 to 5.8% this past year.* Basically, what Schneider notes is that while students and their families' ability to pay was decreasing (in real terms), the real price of college was increasing.

Of course, as Schneider also notes, one of the primary ways in which colleges try to mitigate this fundamental disconnect in pricing is through price discrimination. (Because Schneider restricts his discussion only to institutional grants, his graphs understate the extent of price discrimination for students). Nevertheless, even looking only at institutional aid reveals college pricing to be the mess that it is:

This crazy quilt of discounting creates a complicated pricing system that is hard for anyone to understand—and probably benefits nobody, except perhaps colleges and universities.... [W]e have no idea how many students are scared off from applying to college by the high and ever-increasing tuition that schools post, and we are yet to find out how well schools do in displaying their net price and how much such information will affect student choice.

*To compute these annual rates of increase, I took the May-to-May percent increase in the college tuition and fees index numbers reported by the BLS.

Chart of the Week: Percentage Receiving Financial Aid

This week, CCAP looks at the increasing percentage of full-time undergraduate students receiving any type of financial aid. The 2009 Digest of Education Statistics has limited annual data on this, but between 1993 and 2008, the percentage of of students receiving financial aid rose over 18 percentage points.

Chart of the Week: Rise in Aid Per FTE Student

The rise in third-party payments has been a contributing factor to the soaring costs of higher education. Students are less price sensitive because of these payments, and universities have expanded their budgets and tuition prices accordingly. The graph below shows in real terms that student aid for full time equivalent students has nearly tripled since 1980.

Chart of the Week: Growth in Federal Aid

After a long absence, the CCAP Chart of the Week is making a return.

The below graph depicts the growth in real terms of total federal student aid since 1980. These figures exploded in the last decade, nearly doubling between 2000 and 2009, beyond the rate of inflation.

Government Fix-Its Encourage Indebtedness

By John Glaser

How Income-Based Repayment will make you poorer:

The federal government introduced Income-Based Repayment, or IBR, last year to provide relief to federal student loan borrowers who are struggling to manage their loan payments.

IBR provides a formula that caps monthly payments at 15% of discretionary income. Borrowers who make all their income-based payments for 25 years have the balance of their federal student loan debt forgiven at the end of that period...

The problem for borrowers is that extending you payment term will dramatically increase the amount of interest you'll pay over the life of the loan - and if you take the full 25 years to repay your debt, you'll be around 46 by the time you're debt free. That's a very, very hard way to establish a solid financial life.

This is another government provision in a long line of them (from student aid programs to university grants) which performs the opposite of its intended goal. It effectively sanctions the rising costs of higher education by placing less strain on the price to consumers, and encourages indebtedness until your twilight years.

Such circumstances certainly help explain why 80% of college graduates are going back to live with their parents, mainly to save money.

A survey of last year's college graduation class showed that 80 percent moved back home after getting their diplomas, up significantly from the 63 percent in 2006. The CollegeGrad.com survey of 2,000 young people showed that seven in 10 said they would live at home until they found a job.

..."I want to save money, so I'm not just getting by," said the 22-year-old who graduated from Washington College in 2009, and spent nearly a year working internships — paid and unpaid — before she could put her degree to use in a marketing firm.

Blaming Former Presidents

by Daniel L. Bennett

The Obama Administration likes to blame former President Bush for the growing national deficit, although the new administration has certainly not shown any restraint in combating this problem. Well, I've got some blame to place on former presidents myself - rapid tuition inflation over the past several decades can and should be attributed to former presidents, beginning with Jimmy Carter. In 1978, the Carter Administration passed the Middle Income Student Assistance Act (MISSA), which extended federal guaranteed loans to all students, regardless of financial need or income. Before this, federal loans were restricted based on income and need.

The above chart shows federal aid expenditures by program type, in constant 2008 dollars, between 1970-71 and 2008-09. As we can see, loans dollars began escalating rapidly a few years after MISSA was passed by President Carter. The sharp spike that we see again in 1992-93 marks the expansion of the Parent Loan (Plus) program and introduction of a new, unsubsidized loan option not restricted by financial need under the last year of the G.H. Bush Administration, and subsequent expansion of the Direct Loan program by newly elected President Clinton in 1993.

What these policy changes did, was increase the ability to pay for students from middle and high income families. My colleague Andrew Gillen, Robert Martin and others have explained this phenomenon quite well, so I won't go into much detail here.

Rising College Costs: A Federal Role?

The NY Times Room for Debate forum today asks the questions:

Is there a connection between federal education aid and the inflation rate in higher education? More broadly, what can Washington do, if anything, to improve the effectiveness of its programs and reduce the costs of college?

Richard Vedder opines:

President Obama wants more and bigger Pell Grants to help relieve rising college costs, along with revamped student loan programs. I think he has it backward: federal student financial assistance is more a cause than a consequence of rising college costs.

Work done at my research center reinforces findings of others that exploding student loan programs have contributed to higher tuition charges, and if Pell Grants grow more inclusive and generous, the same effect will occur with them.

The president joins many Americans in wanting to equalize college participation for all. Yet the root cause of low college attainment among poor people is not a lack of resources. It is dysfunctional living arrangements and abysmal academic preparation in our mostly free public secondary schools, particularly those located in inner cities. Indeed, Pell Grant recipients on average are less likely to graduate within six years from college — despite generous financial aid — than others, in large part because of prior educational deficiencies.

It is an inconvenient truth that a larger portion of college students were from low-income backgrounds in 1970, before Pell Grants, than today. No doubt the rise in college costs relative to family incomes makes more believe that higher education is something for the affluent, not everyone. But the cure — federal student aid — is causing (at least in part) the disease.

The demand for higher education grows with rising federal financial assistance, but the supply grows less rapidly, pushing up prices (tuition fees). Supply is comparatively rigid because the so-called best schools attain their lofty reputation by turning away customers: college rankings are enhanced by taking very qualified bright kids who likely will graduate (and are disproportionately affluent). Dropping money out of airplanes over the houses of college students (or its equivalent) is not the solution.

The three “I”s of higher education reform are incentives, information and innovation. Colleges must provide incentives for their staff to want to cut costs and be efficient, they must provide better information on outcomes and finances to consumers, donors and taxpayers, and they must embrace innovation in the forms of labor-saving technology. That, not more student financial aid, is the key to making colleges more affordable.

Arthur Hauptman also offers some interesting analysis:

Unlike Pell Grants, as part of the aid packaging process, colleges have some control over how much students borrow as loan amounts. Moreover, just as one couldn’t imagine house prices being as high as they now are if mortgage financing were not available, it is difficult to believe that colleges and universities could have increased their charges so rapidly over time without the ready availability of students’ ability to borrow.

As does Pat Callan:

But recent increases in Pell Grants during the Bush and Obama administrations and higher levels of federal expenditure for the program have had little, if any effect, on improving college access and affordability. As additional Pell dollars are absorbed by steep tuition increases, the effect is to shift costs from colleges and states to students and the federal taxpayer, with little or no net gain in higher education opportunity.