Several months ago I discussed “How the American Education System Contributes to Inequality.” It so happens that students from high-income families graduate from college in much greater numbers and also with much less debt, compared with students from low-income families.
A new study from the New York Federal Reserve has found a connection between a rapid increase in student aid in recent years and the rapid increase in college costs. In particular:

• A $1 increase in the subsidized loan cap leads to a tuition increase of 65 cents, and
• A $1 increase in the Pell Grant limit leads to a tuition increase of 55 cents.
• Furthermore, private schools, both nonprofit and for-profit, are bigger offenders than public schools, even though declining state subsidies for higher education primarily affect public universities.
• At the present time undergraduates can borrow a maximum of $57,500 from the federal government.
• Under the decade-old Grad Plus program, graduate students can borrow any amount their school charges. In the seven years before Grad Plus, undergraduate tuition was rising faster than grad school costs. In the seven years after, the reverse occurred.
  Clearly this is an untenable situation. The solution, in my opinion, is to strictly limit the total amount of federal loans for both undergraduate and graduate students and force schools to compete on price. For example:
• Limit the total amount borrowable by an undergraduate, from the federal government, to $30,000, the average amount borrowed today, and then let it adjust it each year for inflation.
• Limit the total amount borrowable by a graduate student to $60,000, the average amount borrowed today, adjustable each year by inflation.
• Students who want to borrow additional funds may do so on the private market, with no subsidies or guarantees provided by the federal government.

Such a program would provide much needed financial discipline to colleges and universities and reduce and stabilize ballooning student loan costs for the federal government.