Federal Student Aid Is Responsible for Ever-Increasing College Tuition Costs

A consensus is growing that federal student aid, however well-intentioned, is directly responsible for increases in college tuition over the past few decades. One studyestimates that expansions of federal student aid roughly doubled tuition costs relative to a baseline, while anotherfinds that each dollar of subsidized Stafford student loans boost tuition by 65 cents. The logic is simple: when students have access to a generous line of credit, colleges will raise their prices because their students can easily borrow the money to pay them.

In theory, since there is a cap on how much students may borrow through the Stafford student loan program (the most common form of student loan), there should be an upper limit to how much federal student aid can fuel tuition increases. Currently, the aggregate cap stands at $31,000 for undergraduate dependent students. But as the cost of college approaches this cap, more and more borrowers may take advantage of a back door—the Parent Loans for Undergraduate Students (PLUS) program.

PLUS loans are loans which the federal government makes to the parents of dependent undergraduate students to finance the students' tuition. (Independent graduate students are also eligible.) They carry a higher interest rate (6.8 percent) than Stafford loans, which have a rate of 4.3 percent for undergraduates. Parents are eligible if they or an "endorser" can pass a basic credit check. Most importantly, there is effectively no credit limit—parents may borrow up to their student's cost of attendance.

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