Game of Loans

SHOCKING new study: Colleges respond to financial aid by raising tuition

by Mr. RightFebruary 8, 2016

We’ve covered this a few times before. If I have a product or service that by all estimations should cost around $10, but I happen to know that there are scads of people willing to pay me $50, I’m not going to charge $10. I’m going to charge $50. I would be an idiot to only charge $10. This phenomenon is the primary reason that college tuition is skyrocketing. It’s basic economics. The government promises kids financial aid or virtually unlimited loans to cover high college tuition and, as a response, colleges raise tuition. This is obvious. They would be stupid not to do that.
Here’s a brief explanation:

But it’s more than just common sense, there have been several studies that verify the fact that government intervention literally makes college more expensive. Here’s another one…
Here’s an excerpt:

With all factors present, net tuition increases from $6,100 to $12,559 [and] the demand shocks — which consist mostly of changes in financial aid — account for the lion’s share of the higher tuition. … These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition. In fact, the tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline from 33% to 27% in the new equilibrium with only demand shocks. Furthermore, the students who do enroll take out $6,876 in loans compared to $4,663 in the initial steady state. The college, in turn, uses these funds to finance an increase of investment expenditures from $21,550 to $27,338 and to enhance the quality of the student body. In particular, the average ability of graduates increases by 4 percentage points. Lastly, the model predicts that demand shocks in isolation generate a surge in the default rate from 17% to 32%. Essentially, demand shocks lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs.

Allow me to sum this up: When government hands out (or backs) ever-increasing levels of financial aid, colleges respond by raising the price of tuition.
But what about “free” college?

Of course, “free” college isn’t really free. The Democrats’ approach shifts costs without necessarily lowering them. Transferring costs away from students onto taxpayers would lower tuition prices while allowing schools to continue operating under their current wasteful cost structures. An influx of new funding might actually lead them to pay less attention to cost-effectiveness than they do now.

Yep. But in spite of the evidence (and logic), Bernie supporters will no doubt continue to cry for “free” college, completely ignorant of any of these concepts.
Read more analysis from the American Enterprise Institute
Look, I realize that this might not be intuitive at first glance. After all, it seems like we’re helping kids by giving them tuition money. The truth, however, is that we’re doing nothing of the kind. And once one grasps this concept, it’s impossible to ignore. Many facets of economics are like this because economics isn’t static, it’s dynamic.

Remember, when a politician promises you something for “free”, please remember that usually means the exact opposite. After all, there’s no such thing as a free lunch.