Do increases in federal student loan limits cause college price increases?

Keeping Tuition Costs Low

Do increases in federal student loan limits cause college price increases? The answer is likely yes. After all, the median (average) student loan debt for 2020 grads was between $20,000 to $25,000 according to the Federal Reserve. This amount is roughly equivalent to four years of tuition at a lower priced four year public college for in-state residents, according to The College Board’s 2019 Trends in College Pricing report. Over the past 3 decades,  the average in-state public four-year tuition and fee price increased 300 percent. Adjusted for inflation, tuition has risen over 2 percent per year beyond inflation of other goods and services.

What other good or service increase that much?

Credit Equals Higher Tuition

Simple price versus demand curves show intersections between demand at different price points. When students and families get such easy student loan approval, without needing good credit scores, costs seem cheaper. Thus, the price can skew higher. The federal government offers up to $7,500 annually in student loans to undergraduate students. Graduate students can borrow $20,500 annually before dipping into PLUS loans.

PLUS loans are a supplement offered beyond the loans directly to students. These loans have minimal credit approval standards and may cover the entire difference in cost of attendance. Why does giving families access to this money hurt them? Borrowing amounts aren’t based on what the borrower could realistically afford to pay back.

A Federal Reserve Bank of New York report led to sticker price increases of 60 percent per dollar.

Who Pays the Sticker Price?

While sticker prices have risen by more than half due to student loans, it doesn’t mean families pay them. For example, the average two-year public college student will receive enough grants, scholarships, etc. to not pay any tuition and fees. Yet, the average sticker price for 2018-2019 was over $3,000, according to the College Board. Income is a big determinate in who pays what. Families who don’t qualify for financial aid will be exposed the most to tuition and increases. For example, College Board also reports that in 2015-16, the average net tuition and fees at public four-year colleges was was 500 percent higher for upper income families than lower income ones.

Bottom Line

Tuition increases due to student loan borrowing amount increases is a staunch reminder to evaluate both out-of-pocket and borrowing costs. We highly recommend calculating future loan payments every semester. In many cases private student loans versus parent PLUS federal loans are a better option with lower interest rates.

Finally, when comparing financial aid letters, don’t just look at the final number. Often times schools may include student loans within financial aid numbers to make it look like you have a lower out-of-pocket cost. But borrowing still costs you money. With good comparison shopping all around, the cost of college may rise, but you’ll pay the lowest cost you can for the school your family chooses.