Thursday, July 09, 2009

The Student Loan Crisis

by Daniel L. Bennett

Our friends over at Education Sector unveiled an interesting report today, cleverly titled Drowning in Debt: The Emerging Student Loan Crisis. Its authors analyzed data from the US Dept. of Education's National Postsecondary Student Aid Survey in order to identify trends in student borrowing. The report contains a number of interesting charts and figures that collectively suggest that more students are borrowing more money today than they were 15 years ago and that grant aid (aside from federal grants) is increasingly based on merit as opposed to need, especially at the institutional level.

The report touches on a topic that I believe is central to understanding the underlying problem with upward spiraling tuition and consequentially, the rise in student debt, stating:
Universities also use a substantial amount of their discretionary aid dollars to attract students who do have academic merit, at least as measured by factors like class rank and SAT and ACT scores, both of which contribute to the influential U.S. News & World Report college rankings. Prestige in higher education is partly a function of attracting “better” students to enroll, and prestige has a price.
In other words, colleges seeking to boost their reputation do so by spending more money. My colleague, Andrew Gillen, introduced the concept of a "prestige curve" as a cost driver in his Financial Aid report, as well as providing evidence that government-provided financial aid has actually contributed to the decrease in college affordability -- the opposite of its intended effect.

Middle and high income students have access to highly subsidized loans, which has increased their ability to pay ever-increasing tuition fees. In turn, this has incentivized colleges to spend exorbitant amounts of money to improve their "prestige" in order to attract these students and the revenues that follow. This effect is described in Robert Martin's recent Pope Center report, The Revenue-to-Cost Spiral. Colleges will continue to exploit this system as long as university transparency remains absent and students are willing to shell out the tuition dollars.

1 comment:

capeman said...

"Colleges will continue to exploit this system as long as university transparency remains absent and students are willing to shell out the tuition dollars."

This sounds exactly like what the local Marxists and other assorted radicals say about the market economy in general. Substitute "corparations, corporate, consumers" for "colleges, university, students" and you have the radical parody of a critique of the market word for word.

If the students think they're taking on too much debt, let them trade down to a less expensive college.

If the government thinks subsidized loans are a bad deal, let the government end them. And then let the chips fall where they may.

One thing of which I'm pretty sure, there would be a lot fewer students, of all kinds, in college. Maybe that is the goal here?