Increased Student Loans Can Yield Higher Tuitions

The New York Federal Reserve was circumspect as it released its analysis of loans vs. tuition:

When students fund their education through loans, changes in student borrowing and tuition are interlinked. Higher tuition costs raise loan demand, but loan supply also affects equilibrium tuition costs—for example, by relaxing students’ funding constraints. To resolve this simultaneity problem, we exploit detailed student-level financial data and changes in federal student aid programs to identify the impact of increased student loan funding on tuition. We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65 percent. We also find that Pell Grant aid and the unsubsidized federal loan program have pass-through effects on tuition, although these are economically and statistically not as strong. The subsidized loan effect on tuition is most pronounced for expensive, private institutions that are somewhat, but not among the most, selective.

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An unacknowledged by-product of this trend is that as student loans go higher as they chase higher tuition, so probably does the chance of loan defaults. This presumes that higher loan amounts are harder to pay, an assumption based on economic analysis much more than tangible evidence. However, the New York Federal Reserve puts the national student debt at a total of $1.16 trillion, which approaches the amount of credit card debt nationwide.

The Washington Post recently pegged the default rate on student loans at nearly 14%. A move toward higher debt, due to some extent on higher tuitions that the higher debt allows, does it equal more defaults?