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Faculty Research

The Case of the Rising Numbers

Research by a BYU Marriott professor indicates that increases in tuition may be linked to the amount of money students are allowed to borrow.

To put it mildly, universities have had their hands full in responding to the COVID-19 pandemic. On 6 March 2020, the University of Washington announced plans to move to online-only coursework, and within a few days, the entire higher education industry was turned on its head.

At Brigham Young University, President Kevin J Worthen announced on 12 March that the winter semester would shift to remote learning, and then the university followed with remote-only spring and summer terms. As Fall 2020 approached, many universities announced plans to again be online only.

While some schools are attempting hybrid models, one thing is clear: education may never be the same. The impact on students has been extreme, and now, months past the original first wave of the novel coronavirus, students are wondering if the tuition they are paying is still worth the education they are getting with only online courses. It’s a debate worth having, especially since tuition costs across the country have skyrocketed in the last two decades.

Exactly why tuition has increased so sharply has been a topic of debate for years. Some argue that inflation plays a role. Some posit that the value of a degree justifies the increasing expenses. But BYU Marriott professor Taylor Nadauld has a different explanation—and a study to back it up: higher ed tuition is rising lockstep with the amount of money the federal government is allowing students to borrow.

“When you think about what is happening with student loans, you have a big chicken-and-egg problem: Is higher tuition causing people to borrow more? Or because people can borrow more, are universities charging more for tuition?” notes Nadauld, BYU Marriott’s H. Taylor Peery Professor of Finance. “We can say with some confidence that increased access to federal-student-loan borrowing results in higher tuition.”

Rising Costs

According to Nadauld’s research, between 2001 and 2012, average sticker-price tuition rose a staggering 46 percent, from $6,500 a semester to more than $10,000 a semester. The following seven years saw tuition jump almost another 25 percent, according to a 2019 report from the Center on Budget and Policy Priorities. And right alongside rising tuition has been a crisis in exploding student-loan debt.

In 2004, the total debt balance for student loans across the country was a bit over $250 billion, according to the New York Federal Reserve Consumer Credit Panel. At that same point, auto-loan and credit-card debt far outweighed student loans, with auto loans at more than $700 billion and credit cards just under $700 billion. Today, student-loan debt far outpaces both: at more than $1.5 trillion, student loans represent the largest form of nonmortgage liability for households.

For St. John’s University Law student Jayne Price Edwards, the sticker shock going into her first year was eye popping. The recent BYU grad started law school in the fall of 2019 with a per-semester tuition price of $31,645 ($63,290 a year). Multiply that out over three years of law school and—not accounting for any tuition increases over the next two years—that is just shy of $190,000.

Edwards received a half-tuition scholarship, and her family helps out a bit, thanks to a 529 savings account that was set up years ago, but the cost is still substantial. “I knew it would be significantly more expensive than BYU obviously, but $63,290 is a big chunk of change,” she says. (For comparison, BYU Law’s tuition is $6,930 a semester or $13,860 a year.) “One of the biggest issues with high tuition is that it stands as a barrier to entry for a lot of marginalized people. But I don’t really see the cost of tuition changing because it’s high everywhere.”

According to Nadauld’s research, tuition costs aren’t high just because education is expensive. His research, which recently won the Michael J. Brennan Award for the best paper published in the Review of Financial Studies in 2019, looks very closely at how specific legislative changes in the maximum amounts that students are eligible to borrow, which went into effect in 2007 and 2008, directly precipitated significant tuition increases at institutions of higher learning across the country.

More Money, More Problems

The Higher Education Reconciliation Act (HERA), passed by Congress in 2006 and effective 1 July 2007, significantly increased the yearly subsidized-loan-borrowing cap for students for the first time since 1992. With that change, freshmen were able to borrow $3,500 (up from $2,625) and sophomores could borrow $4,500 (up from $3,500).


Combing through student loan data from subsequent years provided by the Federal Student Aid Office, Nadauld and coauthors David Lucca and Karen Shen found HERA substantially increased how much students were borrowing. In 2007–08, the subsidized loan originations to undergrads jumped from $16.8 billion to $20.4 billion and the average loan rose from $3,300 to $3,700.

Then, in 2008, the Ensuring Continued Access to Student Loans Act increased the maximum annual borrowing limit on unsubsidized loans by $2,000 for undergraduate students. Once again, students borrowed significantly more money, with unsubsidized loan originations jumping from less than $15 billion to $26 billion in one year.

All of this newly available money was no secret to universities, and it turns out they were happy to get their hands on it. An anecdote the researchers dug up illustrates the point. In their paper, Nadauld and his coauthors quote from the transcript of an earnings call of the Apollo Education Group, one of the most prominent for-profit education companies and the parent organization for the University of Phoenix. A participant on the call asked about the decision to increase tuition costs.

Management responded with the following:

“The rationale for the price increase . . . had to do with Title IV loan limit increases. We raised it to a level we thought was acceptable in the short run knowing that we want to leave some room for modest 2 to 3% increases in the next number of years. And so, it definitely was done under the guise of what the student can afford to borrow.”

A simple analogy from Nadauld helps paint the picture more clearly: “If I walked around BYU Marriott and gave every student a $50 prepaid ATM or debit card but then told them they could only use that money to buy milk in the Blue Line Deli, the price of milk would definitely go up. Unless, of course, they increased the supply of milk,” he says. “If I give everyone who is eighteen to twenty-four years old access to a bunch of money and say you can only use it at universities, then the price at those universities is going to go up.”

Crunching the Numbers

Milk analogies aside, establishing the connection between the increased borrowing amounts and increases in tuition required a little more effort. Starting back in 2014, Nadauld, Lucca, and Shen spent six months sifting through tuition and enrollment data from IPEDS (a system of surveys conducted each year by the National Center of Education Statistics) and student loan data from the Title IV Administration’s Federal Student Aid Office. At that time, both Shen and Lucca were employed at the Federal Reserve Bank of New York (Lucca still is; Shen is now at Harvard University) and Nadauld was a visiting scholar there.

With detailed tuition, enrollment, and loan data, the trio employed a series of “difference-in-differences” statistical tests to isolate the causal effect of increased credit access on tuition costs. The analysis revealed a significant pass-through effect on tuition from the increases in student loan maximums. With piles of empirical evidence, the statistical analysis took a meaningful step towards resolving the chicken-and-egg question: universities appeared to be raising tuition because students were able to borrow more money from the federal government.

According to their calculations, university tuition increased roughly sixty cents for every dollar in increased subsidized loans and twenty cents for every dollar of increased unsubsidized loans. The researchers also found that for-profit institutions, two-year institutions, and the priciest private schools were some of the schools most likely to take advantage of the increased loan availability to students, and these schools also exhibited the most disproportionate tuition increases.

“Nearly 80 percent of the revenue of for-profit universities, such as University of Phoenix, Grand Canyon University, and Devry University, comes through the form of federal aid,” Nadauld says. “They recruit students aggressively and help them access student aid so they can attend. We were not surprised to find these institutions were some of the most likely to react to federal aid changes with tuition increases.”

The three researchers first published their findings in a staff report for the New York Fed in 2015, and a year later, they found themselves testifying before Congress. In writing about the report for Forbes in 2015, Richard Vedder, the director of the Center for College Affordability and Productivity, said the study once again confirmed the Bennett hypothesis—the idea first attributed to former US Secretary of Education Bill Bennett that as federal aid goes up, tuition goes up.

“The major beneficiaries of these federal so-called ‘student’ financial assistance programs are the universities, not students,” Vedder wrote. “Following the money, we see a huge portion of the increment financial largess has gone to fund increased nonteaching staff, super salaries for a small but meaningful portion of the senior faculty and administration, etc.”

Publish, Congress, Impact

It’s been a few years since the research first surfaced, but the initial response, according to Nadauld, was divided along political lines. For conservatives, the paper represented more evidence of the federal government interjecting itself in markets, and for liberals, the paper caused concerns about limiting student access to federal funding.

In the years since the paper first surfaced, Congress has been hesitant to do anything that might curb access to education, such as limiting how students obtain federal money, a move that Nadauld largely supports. A few meaningful aspects of the federal student loan market have been altered since the paper was first published, though Nadauld does not believe any of the changes were necessarily in response to the findings of the paper.

For example, the government has placed new limitations on for-profit universities by introducing default-based performance requirements. In addition, the federal government has since made payment plans more flexible for student loans.

“Students are now able to make payments on their loans based on the amount of income they make,” Nadauld says. “Default rates are still pretty high, but they haven’t really increased since 2014. However, they are likely to start spiking again during the COVID-19-induced recession. When people lose their jobs, recent research has shown that the first loan they default on is their student loans.”

For Nadauld, the escalating student-loan debt crisis was the reason he embarked on this study in the first place. Looking back at the beginning of his career at Goldman Sachs, he believes he was the only new employee in his Global Investment Research Division that graduated from a school west of the Mississippi other than Stanford. Nearly all of his new colleagues had towering student debt loads that paralyzed them when making career choices. He saw firsthand evidence of the research that indicates high student-loan debts delay major life choices for college graduates, including starting a family, returning to graduate school, or looking for different job opportunities.

Nadauld, with an undergraduate degree from BYU and nearly no student debt, felt confident in his path to start a family and even return to graduate school because his family could handle some additional debt. He does not want to see new graduates feeling constrained in their career, education, and family choices because of student debt. He believes BYU offers low tuition for that exact reason.

“I don’t think people—students in particular—give BYU enough credit for this,” he says. “I don’t think they appreciate the magnitude of the financial benefit that BYU provides. Given the cost of tuition at comparable quality private universities, any student who is accepted to BYU is getting a $30K or $40K scholarship right off the top.

“It’s important to recognize that a university education is still the best investment an individual can make,” Nadauld continues. “The gap between the wage of a college graduate and a high school graduate is the largest it has ever been—and it’s increasing. Just be careful as you incur student debt. While the investment is worth it, you still want to be able to make major life choices without student loans weighing you down.”

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Written by Todd Hollingshead
Illustrations by Eric Chow

About the Author
Todd Hollingshead is a media relations manager in BYU’s University Communications office. A former journalist, Hollingshead holds a bachelor’s degree in journalism and a master’s degree in mass communications from BYU. He lives in Springville, Utah, with his wife, Natalie; their four children; and a pug and a cat.