Even assuming that all of this increased spending is enabled by easier access to capital (through federal debt, as you say), it doesn't really answer the problem. The incentive to lower the cost should still be there.
Suppose before introducing government loans, university education costed ~$X/year on average. The government puts additional $Y/year on the table, so (putting the issue of repayment aside) now people can afford to spend $(X+Y)/year. Why then the colleges that can provide the service for $X increase the price to $(X+Y), when they could have kept the price, so that customers choosing them would only pay $(X-Y) out of pocket? Market should clearly favor the service providers who did that, so why doesn't it?
Rebar now costs something like $600/ton. Suppose government gave direct subsidy for rebar used in building construction of $300/ton. Would it increase the rebar price to $900/ton? I don't think so -- the companies that continue to charge $600 would clearly undercut the companies that try to charge $900. Of course, there are some secondary effects, like the increase of demand for rebar as a result of the subsidy, which could probably increase the price a bit if the supply is limited, but there would still be incentive to drive the cost down (at least until the subsidy cover the whole price).
> The incentive to lower the cost should still be there.
the incentive is for the buyer. the seller has no incentive. seller's incentive is to raise the price as high as possible before it begins to curtail demand. if demand is held constant (or even stimulated to new growth) by supplying debt financing, then the seller will just keep raising costs.
My theory is colleges are, in effect, selling a positional good[1], one whose value depends on its ranking relative to other goods. People go there to prove that they are in the nth percentile by some desirable quality.
Positional goods providers behave like monopolists when (the perception of) that ranking can't easily change, and buyers place extreme importance on being in the nth percentile.
To compare back to the rebar example, if a buyer had to get rebar from a top 3 provider (rather than simply "rebar above X psi strength etc"), and the top 3 never changed, you'd probably see the same effect, and they would simply raise prices with every subsidy.
But the healthcare is not like this, and neither is housing: going to a better doctor is a very weak status signal, and while some people do spend a lot of money on housing to signal their status, for average person the function of their house or apartment is to provide roof over their head.
Don't you look for the best doctor when choosing healthcare? Often, the best doctors cost more money since they have limited time.
Spending more on housing is difficult because the location component of a house usually effects the price as much or more as the quality/size of the house itself.
Suppose before introducing government loans, university education costed ~$X/year on average. The government puts additional $Y/year on the table, so (putting the issue of repayment aside) now people can afford to spend $(X+Y)/year. Why then the colleges that can provide the service for $X increase the price to $(X+Y), when they could have kept the price, so that customers choosing them would only pay $(X-Y) out of pocket? Market should clearly favor the service providers who did that, so why doesn't it?
Rebar now costs something like $600/ton. Suppose government gave direct subsidy for rebar used in building construction of $300/ton. Would it increase the rebar price to $900/ton? I don't think so -- the companies that continue to charge $600 would clearly undercut the companies that try to charge $900. Of course, there are some secondary effects, like the increase of demand for rebar as a result of the subsidy, which could probably increase the price a bit if the supply is limited, but there would still be incentive to drive the cost down (at least until the subsidy cover the whole price).