Alexandria

College costs are increasing at about twice the rate of consumer prices. As Felix Salmon notes, this means they increased 12 fold over the last 30 years. The reasons for this level of increase are still debated. John Hechinger reports that universities have seen a huge increase in administrative costs.**

U.S. universities employed more than 230,000 administrators in 2009, up 60 percent from 1993, or 10 times the rate of growth of the tenured faculty, those with permanent positions and job security, according to U.S. Education Department data.
Spending on administration has been rising faster than funds for instruction and research at 198 leading U.S. research universities, concluded a 2010 study by Jay Greene, an education professor at the University of Arkansas.
“Administrative bloat is clearly contributing to the overall cost of higher education,” Greene said in a telephone interview.

Salmon goes on to cite McArdle who makes the argument that student loans contribute to rising costs. The excessive amount of money pouring into student loans has driven up the costs as students compete for admission. I think there is a lot of merit to this argument. More money chasing a fixed number of positions has to increase costs. Of course, we can also look at this from the other side. Are those students able to pay back those loans? If they are not, we are subsidizing education for which there are not jobs to repay those loans. To answer this question he notes a Department of Education paper cited by Mike Konczal. Konczal suggests that we should think of student loans not as aid, but as a means overcoming credit restraint. The question then becomes whether we are losing money on the loans, a subsidy, or are we getting a return on them? He claims that me are getting a return of about $114 for every $100 that we make in student loans.

There’s a narrow, though important, question about whether or not student loans are a “subsidy” because their interest rates are too low or too high. The Department of Education found that (R-10) for “Direct Loans, the overall weighted average subsidy rate was estimated to be -13.91 percent in FY 2011; that is, the overall program on average was projected to earn about 13.91 percent on each dollar of loans made, thereby providing savings to the Federal Government.” What’s a good word for the opposite of a subsidy? Whatever it is, student loans are that.

I will have to say that this number surprised me. Given the publicity about students not paying back loans, I had expected a significant loss on student loans. Instead, we are getting a positive return on money that we lend to students. or are we? Jason Delisle, in a paper cited by Konczal, suggests that our return is inadequate. He compares interest rates charged by private entities for student loans with those offered by government loans. He suggests that some of the costs for government loans are hidden, so that using a comparison with private sector loans is necessary to determine if we are subsidizing these loans. By his estimates we are actually subsidizing student loans by 12%. In other words, we are getting a positive return on student loans, but we should be getting more. We should be charging higher interest rates by his estimation, if our goal is to not subsidize education.

** HAving recently made the rounds looking at schools, I am convinced that spending on dorms and entertainment facilities for students is a major source of increased costs.