The Federal Aid and College Affordability Curve
Linear or Laffer?
Ilan Wurman
Last Updated: 9/26/07 Section: News
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As part of the first "100 hours" of congressional activity under the new Democratic Congress, the House of Representatives voted to reduce the interest rate of Stafford loans from a fixed rate of 6.8 to 3.4 percent. It is legislation that smacks of typical Washington behavior: Be quick to appear active; ignore the real problems. The explosion in federal aid to college students, especially in recent years, has done little to help more Americans attend college. Federal aid programs increase the demand for college, which in turn leads colleges to raise their tuitions. What results is a game of give-and-take between federal aid and college prices.
Between 1900 and the late 1960s, the government provided little federal aid to college-bound students. The major exception was, of course, the GI bill, which opened the doors of higher education to nearly eight million servicemen. Despite minimal federal aid-only 1.6 billion dollars by 1970-the number of young adults between 18 and 24 years old attending college increased from 23 per 1,000 in 1900 to 324 in 1970. Between 1970 and 1990, total federal aid approximately quadrupled to 19 billion dollars accounting for inflation, which was accompanied by an increase in students attending college from 324 to 506 per 1,000 in that same age group. While the aid clearly helped, it does not seem to have mirrored the dramatic increase in college attendance that resulted in earlier decades without federal aid. What is more, federal aid further tripled between 1990 and 2000 from 19 to 63 billion dollars, and the only accompanying increase in college attendance was from 506 to 545 per thousand among 18-to-24-year-olds.
Excessive federal aid is hardly effective. Many contend that the aid goes to students who would have been able to afford college without it, and that federal aid increases demand and thus raises prices. As Richard Vedder, director of the Center of College Affordability and Productivity, wrote recently, "Third parties (e.g., the federal or state governments, private philanthropists) pay a large chunk of the bills, rendering the customers relatively insensitive to prices." He then quipped, quite fittingly, that this cause-and-effect was "health care revisited." The principle is the same. When someone else pays, demand goes up; when demand goes up, so do prices. Vedder compares federal aid and college affordability to the relationship between taxes and revenue, which works like the Laffer curve. While federal aid helps at first, there is a point at which federal aid negatively impacts college affordability.
Claremont McKenna's Treasurer's Office did not return the Claremont Independent's requests for data on CMC tuition over the past two decades, and nor did it return requests for comment on the decision-making process regarding tuition. Nonetheless, most observers would be quick to point out that CMC's tuition has not been an exception from the trend over the past two decades. College tuitions are skyrocketing, and federal aid as it is may only exacerbate the problem. In its first "100 hours," the Democratic majority has already proved itself willing to flaunt the basic rules of economics.
Between 1900 and the late 1960s, the government provided little federal aid to college-bound students. The major exception was, of course, the GI bill, which opened the doors of higher education to nearly eight million servicemen. Despite minimal federal aid-only 1.6 billion dollars by 1970-the number of young adults between 18 and 24 years old attending college increased from 23 per 1,000 in 1900 to 324 in 1970. Between 1970 and 1990, total federal aid approximately quadrupled to 19 billion dollars accounting for inflation, which was accompanied by an increase in students attending college from 324 to 506 per 1,000 in that same age group. While the aid clearly helped, it does not seem to have mirrored the dramatic increase in college attendance that resulted in earlier decades without federal aid. What is more, federal aid further tripled between 1990 and 2000 from 19 to 63 billion dollars, and the only accompanying increase in college attendance was from 506 to 545 per thousand among 18-to-24-year-olds.
Excessive federal aid is hardly effective. Many contend that the aid goes to students who would have been able to afford college without it, and that federal aid increases demand and thus raises prices. As Richard Vedder, director of the Center of College Affordability and Productivity, wrote recently, "Third parties (e.g., the federal or state governments, private philanthropists) pay a large chunk of the bills, rendering the customers relatively insensitive to prices." He then quipped, quite fittingly, that this cause-and-effect was "health care revisited." The principle is the same. When someone else pays, demand goes up; when demand goes up, so do prices. Vedder compares federal aid and college affordability to the relationship between taxes and revenue, which works like the Laffer curve. While federal aid helps at first, there is a point at which federal aid negatively impacts college affordability.
Claremont McKenna's Treasurer's Office did not return the Claremont Independent's requests for data on CMC tuition over the past two decades, and nor did it return requests for comment on the decision-making process regarding tuition. Nonetheless, most observers would be quick to point out that CMC's tuition has not been an exception from the trend over the past two decades. College tuitions are skyrocketing, and federal aid as it is may only exacerbate the problem. In its first "100 hours," the Democratic majority has already proved itself willing to flaunt the basic rules of economics.
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