Do Bigger Loans Equal Higher Tuition?
NEW YORK ( MainStreet) On its face, it would seem that the gradual rise in the cost of college would somehow be linked to the increases in Stafford loan limits made during the financial crisis.
The Government Accountability Office (GAO) says: maybe not.
A GAO report released this week stated that while college costs have been rising consistently for over a decade, "it is difficult to conclude that a direct relationship exists between increases in college prices and the Stafford loan limit increases that were enacted in 2008 and 2009 because of the confluence of many other factors that occurred around the time the loan limit increases took effect."
The financial crisis was at the top of the GAO's list of factors. "Specifically, when the loan limit increases took effect, the nation was in a recession, which created one of the most tumultuous and complex economic environments in recent history," the report said.
The report was made no recommendations on controlling the cost of college. The Consumer Financial Protection Bureau and the Department of Education punted on comments. Nevertheless, the GAO acknowledged that it wouldn't be crazy to suggest that bigger loans would beget higher tuition and ancillary fees.
In a February 18 letter to Senator Tom Harkin (D-Iowa), chair of the Senate Health, Education, Labor and Pension Committee, Jacquiiline Nowicki, GAO's acting director of Education, Workforce and Income Security Issues stated, "Although increasing federal loan limits would give students more resources to pay for college, there is also concern that the availability of this additional resource might present an incentive for colleges to charge more."
GAO's analysis found that the economic effects of the recession make it difficult to isolate the impact on students' decisions to borrow money for college expenses when loan limit increases were added to the mix.
The report added that "federal, state, and institutional aid available to students also increased significantly around the same time the loan limit increases went into effect." What impact did this have on the decision of students to take advantage of increased Stafford loan limits? The GAO drew no conclusions.
At the same time, the GAO's analysis also demonstrated that "even though college prices continued to increase at a gradual pace over the last decade as well as after the loan limits increased, enrollment, which can be sensitive to price increases, also generally continued to grow across both public and private institutions and in all regions of the country."
Private student lending dropped by about 50% during the period when Stafford loan amounts were increased, as non-bank lenders saw capital dry up and abandoned the market. The remaining private lenders tightened their lending standards, as prospective borrowers struggled with unemployment and consumer loan delinquencies and defaults that left them unqualified for these loans.