We’ve been debating for three decades the question of whether federal student aid leads to higher college tuition. Now a new and well-placed voice has weighed in.

In 1987 then-Secretary of Education William J. Bennett argued that “increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.” The higher education establishment indignantly denied the claim.


But there was no doubt that tuitions were rising faster than the inflation level. And while some people insisted that federal and state aid to higher education was being cut back, that was hard to credit. Bennett pointed out in 1987 that federal student aid had risen 57 percent since 1980, while inflation had been 26 percent. A 2020 study by the Congressional Budget Office brought the numbers up to date: “Between 1995 and 2017, the balance of outstanding federal student loan debt increased more than sevenfold, from $187 billion to $1.4 trillion (in 2017 dollars).”

A 2017 study from the Federal Reserve Bank of New York found that the average tuition increase associated with expansion of student loans is as much as 60 cents per dollar. That is, more federal aid to students enables colleges to raise tuition more. Salaries rise; bureaucracies expand; more courses — from “History and Analysis of Rock Music” to “Ultimate Frisbee” — are offered; dorms, dining halls, and recreational centers become more lavish. Even with all this spending, employers don’t find that new grads are well prepared for the workplace.

But now, in addition to academic studies, we have an insider’s testimony. For a new book and a lengthy Wall Street Journal article, reporter Josh Mitchell talked to Al Lord, former CEO of Sallie Mae, then the quasi-government enabler of federal student loans. At the time Lord viewed student debt as a good investment for families, and he made Sallie Mae the biggest student lender. But now, in retirement, he has a confession to make.

He joined the board of Penn State, and, Mitchell writes,

he had an epiphany: Colleges were incredibly inefficient businesses, and the student-loan program enabled them.

He was stunned to learn how big Penn State’s budget was, about $5 billion [in 2014], and how quickly it grew. (Penn State’s budget is currently $7.7 billion.)

He was also stunned to discover how much his grandchildren’s college educations were costing, as much as $75,000 a year per child. He had known that colleges were raising their prices faster than inflation, but he figured it would have to stop. But it hasn’t. “They raise them because they can, and the government facilitates it,” he told Mitchell.

“Schools were able to hike tuition since students now had expanded access to loans,” Mitchell summarizes. 

Federal student loans went up. So did tuition, college budgets, and the debt that students carry for years. This system isn’t working.