Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs

The causes of the rapid growth in the price of college education have been the source of much debate in recent years, and the similarly quick growth in student borrowing, funded largely through federal student loan programs, has also been of substantial concern. This paper studies the relationship between these twin increases, and in particular, the extent to which increased access to student credit has contributed to rising tuition. To disentangle the simultaneity of the education cost and credit, we exploit detailed student-level financial data and changes in federal student aid programs to identify the impact of credit on tuition. We find that institutions more exposed to changes in these programs increased their tuition disproportionately around these policy changes, with a pass-through effect on tuition from changes in subsidized loan maximums per qualifying student of about 60 percent, and smaller but still positive pass-through effects of Pell Grant aid and the unsubsidized federal loan program. The subsidized loan effect is most pronounced for more expensive degrees, for those offered by private institutions, and for twoyear degrees or vocational programs.