Stated another way, the more money poured in to student loan programs, the higher the tuition charged. Tuition goes up because of student loans rather than the view that student loans go up in response to higher tuition.
Consistent with the model, we find that even when universities price-discriminate, a credit expansion will raise tuition paid byall students and not only by those at the federal loan caps because of pecuniary demand externalities. Such pricing externalities are often conjectured in the context of the effects of expanded subprime borrowing on housing prices leading up to the financial crisis, and our study can be seen as complementary evidence in the student loan market.
From: Lucca, D., Nadauld, T., Shen, K. (2015, 2017). Credit supply and the rise in college tuition: Evidence from the expansion in Federal student aid programs. Staff Report no. 733. Federal Reserve Bank of New York.
As the authors note, this is similar to other areas where a third party supply of money causes prices to rise – such as the effect of cheap mortgages causing home prices to rise.
A similar effect occurs in health care where third party “insurance” benefits are an enabler of higher priced health care services.
Whenever the cost of goods are services are subsidized such that their immediate direct costs are lower than the market clearing price, demand for those goods and services will increase. As demand increases relative to supply, the prices charged increase to a new actual and higher market clearing price.
Student loan programs are a major cause of tuition hikes. Cheap mortgages are a major cause of rising home prices. Health “insurance” is a major cause of higher prices charged in health care.