Urgent reforms are needed to reduce the rapidly increasing debt burden on US students, according to a new report.

From 2007 to 2012, total student debt in the US nearly doubled from $548 billion (£355 billion) to $966 billion, with the average loan balances of recent graduates rising from $16,425 to $21,402.

A report published by the Manhattan Institute for Policy Research, argues that the problem is largely systemic.

Federal financial aid programmes as they are currently set up give colleges “virtually no incentive to lower costs”, the report says, since they know “full well that the government will accept any increase and factor it into the aid award”.

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Moreover, “since the price of any college does not necessarily reflect the value of the education that it provides, students and parents are uninformed consumers,” it continues.

“They have almost no power to bring down prices…By insulating colleges from competitive pressure, student loans distort the incentives of colleges and universities.

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“The problem of growing student loan debt cannot be addressed without rethinking our federal loan program.”

The report coincides with the publication of new data in the Organisation for Economic Cooperation and Development’s Education at a Glance publication, which shows that in 2010 the proportion of GDP spent on higher education in the US rose from 2.6 per cent to 2.8 per cent. However, the increase was almost entirely down to an increase in private funding, in the form of rising student fee income.

The Manhattan Institute for Policy Research says that in order to get a grip on fee inflation, “student aid should be de-linked from the cost of attending a specific college”.

A revamped student loan programme should instead provide grants calculated on the basis of the median cost of attendance at non-profit private, public and community colleges as well as at for-profit colleges, it argues.

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The institute argues that this would have the effect of making colleges more competitive and students more selective while alleviating the pressures which have led to student debt being the only form of household debt that has increased during the recent recession.

matthew.reisz@tsleducation.com