How subsidies increase the cost of tuition

Much like the housing crisis, by making it cheaper to borrow, a bubble has formed in tuition prices schools can charge (WSJ):

Federal student loans allow Americans to borrow at below-market rates with scant scrutiny of their credit and no assessment of their ability to repay. Meanwhile, federal Pell grants, which help low-income college students and don’t need to be repaid, more than tripled to more than $30 billion a year between 2001 and 2012. Education tax credits roughly quadrupled to about $20 billion a year.

The cost of getting a degree similarly exploded. From 2000 to 2014, consumers’ out-of-pocket costs for college and graduate-school tuition rose 6% a year, on average, according to the Labor Department’s consumer-price index. By comparison, medical-care inflation looks meek at an average 3.8%. Overall consumer prices climbed 2.4% a year.

Correlation or causation? The study looked at schools that derive a great share of revenue from student aid with those that derive a small share from aid. It compared tuition growth at those schools during the past decade with several moves made by Congress to increase caps on individual Pell grants and undergraduate subsidized loans, which are based on financial need and have better terms than unsubsidized loans.

The study found that, on average, for a $1 increase in the subsidized-loan cap, tuitions rose by as much as 65 cents. For Pell grants, it translated to 55 cents on the dollar. The study pinpoints private schools—both nonprofit and for-profit—as bigger offenders than public ones.