Why has the cost of college risen so drastically?
In 1987, Reagan education secretary William J. Bennett penned an op-ed in the New York Times explaining what was later known as the Bennett hypothesis. As Bennett argued, colleges reacted to government subsidies by raising the price of tuition.
Suppose college costs $1000 a year, and the government decides to hand every student $500. While in theory this should cut the cost of college in half for everyone, in reality colleges are more likely to raise the price of college to $1500 to absorb the subsidy.
Government has subsidized college heavily in past decades and the cost continues to rise.
So was Bennett right?A new study from economists Grey Gordon and Aaron Hedlund at the National Bureau of Economic Researchsays yes – government is almost entirely to blame for the rise in the cost of college.
To give some background information, the price of college from 1987-2010 rose from $6,600 to $14,500 in 2010 dollars – which is $6,000 more than the equal rate of rising healthcare costs.
The paper, in pure economist-speak, found that:
To translate this into non-economist’s English, the authors were examining the effect that increases in Stafford loan limits and Direct PLUS loans had on the rise of tuition (both of which are government loans). Those two factors alone caused tuition to increase 102% since 1987 (of the total 120% increase), while tuition would’ve only risen by 16% due to other factors had those federal loans not existed.
The demand-side shocks by themselves cause tuition to jump by 102%. With all other changes except the demand-side shocks, tuition only increases by 16%.
So when Hillary Clinton (wrongly) claims that “Not one of the 17 GOP candidates has discussed how they’d address the rising cost of college,” we shouldn’t necessarily view that as a negative, so long as they don't advice more government.