GAO Investigates Impact of Increasing Student Loan Borrowing Limit, Finds Basically Nothing

A common criticism of federal financial aid in America, particularly among conservative pundits, is that America’s student loan and grants programs make college more expensive.

As former U.S. Secretary of Education William Bennett put it in a piece he wrote in the New York Times back in 1987, “increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase.”

And in the long run, Bennett explained, that ends up making it more difficult for poor students to go.

This is taken as basically dogma in the conservative community. As Cato’s Neal McCluskey put it in 2012:

Consider that $65 billion going directly to students and its effect on demand: A student will “purchase” education at a price he can afford. Extra education money enables him to pay a higher tuition. In the aggregate, multiple billions in student aid artificially inflate demand — and average tuition.

This does seem like a rather compelling argument. If you give a whole group of people a lot of free money that they have to spend in one place, it makes sense for that place to try to capture all of the money it can. But we still don’t really know if it’s true. People have been investigating for years, and the results are always inconclusive. Many things impact college pricing. Is federal aid really to blame?

And now, after a long-term, very careful research project by the U.S. Government Accountability Office… we still don’t really know.

In 2008 Congress increased the limit on student loans people could borrow. As a result of this change, it also mandated that the GAO provide a report about the impact of the increase. The GAO investigated,

(1) the extent to which, if any, the Stafford loan limit increases affected tuition, fees and room and board prices at institutions of higher education; and (2) the trends in private student loan borrowing since the loan limits took effect. GAO developed a statistical model to explore whether the loan limit increases in academic years 2007-08 and 2008-09 had an impact on college prices in subsequent years. GAO analyzed data from the Department of Education (Education) and the Consumer Financial Protection Bureau (CFPB), and interviewed officials from eight higher education institutions.

What the office find? Well, nothing much:

It is difficult to determine if a direct relationship exists between increases in college prices and the Stafford loan limit increases because of the confluence of many other 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. GAO’s analysis found that the economic effects of the recession, which affected families’ employment, income, and net worth make it difficult to isolate the impact the recession had on students’ decisions to borrow money to finance college expenses versus the impact of the loan limit increases.

And about that tuition.

GAO’s analysis shows 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.

It certainly doesn’t make college cheaper, that’s for sure, but the truth is that we’ve still really got no evidence of the Bennett hypothesis.

When colleges get more money from the federal government they raise tuition. When they get less money from the government, they raise tuition. When federal financial aid doesn’t change at all from year to year, they raise tuition. Colleges that get a lot of their income from federal financial aid mostly raise tuition every year. But colleges that get very little of their money (at least as a percentage of total income) also still raise tuition every year.

The GAO report is, it’s worth pointing out, a specific look at the impact of increases in the limits allowed under Stafford student loans. The Bennett hypothesis was a more general idea about federal aid. But still, another investigation; another time the pattern just isn’t that clear.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer