Is federal student aid the cause of rising tuition?

12 Jun

About 25 years ago, Secretary of Education Bennett introduced a hypothesis about the rising cost of college. Andrew Gillen describes the “Bennett Hypothesis” in The Center for College Affordability & Productivity report, Introducing Bennett Hypothesis 2.0:

A quarter of a century ago, then Secretary of Education William J. Bennett made waves by declaring:

If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.”1

From that point forward, the notion that increases in financial aid cause increases in tuition has gone by the moniker of the Bennett Hypothesis, and its validity has been hotly debated ever since.

The debate about what causes increases in college costs continues.

Josh Mitchell has an intriguing article in the Wall Street Journal (WSJ) article about a study documenting increased tuition in for-profit colleges where there is increased federal student aid. In New Course in College Costs, Mitchell reports.

The new study found that tuition at for-profit schools where students receive federal aid was 75% higher than at comparable for-profit schools whose students don’t receive any aid. Aid-eligible institutions need to be accredited by the Education Department, licensed by the state and meet other standards such as a maximum rate of default by students on federal loans.

The tuition difference was roughly equal to the average $3,390 a year in federal grants that students in the first group received, according to the National Bureau of Economic Research working paper by Claudia Goldin of Harvard University and Stephanie Riegg Cellini of George Washington University.

The authors only examined programs that award associate’s degrees and nondegree certificates in fields including business, computer sciences and cosmetology. They didn’t look at tuition charged for bachelor’s degrees or at public and private nonprofit universities, which together educate roughly 90% of postsecondary students.

The authors said their findings lent “credence to the…hypothesis that aid-eligible institutions raise tuition to maximize aid.”

Steve Gunderson, president of the Association of Private Sector Colleges and Universities, a trade group for for-profit schools, disputes a link between federal aid and prices, saying colleges merely respond to market demand.

The study’s authors warned their findings don’t apply to public colleges and private nonprofit schools, which they say are different because they aren’t motivated by profits and because their prices are largely determined by state funding and donations.


Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges

Stephanie Riegg Cellini, Claudia Goldin

NBER Working Paper No. 17827
Issued in February 2012
NBER Program(s):   DAE   ED   PE

We use administrative data from five states to provide the first comprehensive estimates of the size of the for-profit higher education sector in the U.S. Our estimates include schools that are not currently eligible to participate in federal student aid programs under Title IV of the Higher Education Act and are therefore missed in official counts. We find that the number of for-profit institutions is double the official count and the number of students is between one-quarter and one-third greater. Many for-profit institutions that are not Title IV eligible offer programs and certificates that are similar, if not identical, to those given by institutions that are part of Title IV. We find that the Title IV institutions charge tuition that is about 75 percent higher than that charged by comparable institutions whose students cannot apply for federal financial aid. The dollar value of the premium is about equal to the amount of financial aid received by students in eligible institutions, lending credence to the “Bennett hypothesis” that aid-eligible institutions raise tuition to maximize aid.

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The reasons for escalating tuition are complex.

David H. Feldman writes in the article, Myths and Realities about Rising College Tuition for the National Association of Student Financial Aid Administrators.

The dysfunction narrative is the alternative tale of rising cost, and it is a sexier story with lots of villains. But it doesn’t fit the evidence very well. In this brief space I cannot address every part of that narrative, but a few choice nuggets of information should suffice. 

Competition: If prestige competition were a driving engine of college cost, we would expect to see cost rising more rapidly in four-year schools than at community colleges. Four-year programs house the expensive research facilities and hire the superstar scholars. Yet the growth rate in expenditures per student at four-year and two-year programs is quite similar. 

Administrative Bloat: Within the dysfunction narrative, any increase in the number of “administrators per student” is often taken as evidence of inefficiency. This notion is flawed on at least two grounds. Schools have dramatically reduced their clerical employment, and this raises the percentage of the employee base that is administrative. This is not a sign of inefficiency. At the same time, schools have added professional staff in everything from IT to counseling. But these same shifts are happening almost everywhere in the U.S. economy. The percentage of Americans who work in jobs classified as administrative has risen substantially over the last quarter century. This context is often missing from bloat stories, as is the benefit to student retention rates and graduation rates from the professionalized support staff available to help them.

Tenure: Lastly, faculty tenure and workplace culture have very little to do with college cost. For starters, tenure is a declining institution. The fraction of the faculty on tenure track has fallen steadily over the past few decades, especially at cash-strapped public institutions. Although the academy is not a particularly efficient institution, there is no good evidence that it has become more inefficient over time.

The Realities Are More Complex

The most important engine of cost growth in higher education is the fact that productivity growth in some industries, like manufacturing, has outstripped productivity growth in others, including artisan services like higher education. But this effect does not necessarily make college less affordable to the average family. Productivity growth, after all, adds to the nation’s income. To understand college affordability problems, we must look elsewhere. 

Two features of the economic landscape have had a big effect on affordability. The first is a sea change in budget priorities in the states. In 1975, states allocated roughly $10.50 to higher education for every $1,000 of per capita state income. Today the figure is around $6.00, despite a massive increase in the number of students seeking postsecondary education. This type of budgeting has resulted in tuition increases at public universities, which have negatively impacted the availability and quality of their academic programs. The effect on affordability is clear. In 1975, the states picked up 60% of the tab for a year in college while families shouldered 33%.  The federal government picked up the remaining 7%. Today, the states pay only 34% while families bear 50% of the cost. The federal government’s share, through grants and tax credits, is currently 16%. Much of this surge in the federal government’s share is a temporary response to the 2008 financial crisis and recession. Over the last 30 years, the federal share has normally been in the 10% range.

Over the same span of years, the income distribution in the United States has changed dramatically. This is another major force for creating affordability problems in higher education. In the 1960s, an average person with a high school diploma could live a comfortable, middle-income lifestyle. That statement no longer holds true. As people who were once solidly middle class find themselves falling further down the distributional ladder, their children increasingly find a college education more difficult to finance.

Figure 2 shows how the U.S. income distribution has changed over the last 45 years.  Two things are apparent: First, the bulk of the income gains over the last generation have gone to people with above-average income; these people are mostly the well-educated. Second, over the last decade, all but the extremely wealthy (top 1-2%) have seen their real income stagnate. This is why the affordability problem has so captured the public’s attention in recent years. Even families with incomes well above the national median are feeling pinched.

Private schools have long used tuition discounting as a way to reach families whose personal finances make an expensive private program a financial stretch. But discounting is itself a force for pushing up the list-price tuition that wealthier families pay. Schools need revenues to finance their programming, and if they discount the price to some students who otherwise could not come, they must increase it for others who can pay. 

Over the last 20 years, private universities have pushed the envelope on tuition discounting, and this has increased the average list price. In 1993, for instance, the discount rate at private universities was roughly 25%; ten years later it had reached 32%. This means that list-price tuition rose by 30% more than if the discount rate had remained the same. Coupled with rising tuition at cash-starved public universities, the result is that many upper middle-income families increasingly bear the full impact of rising list-price tuition at both public and private institutions.


Myth: Increases in Federal Student Aid Drive Increases in Tuition

The Center for College Affordability & Productivity

Did Federal Aid Break the Education Market?

Gillen concludes his report with the following conclusion:

Original Bennett Hypothesis + a couple refinements + Bowen’s Rule = Bennett Hypothesis 2.0.

The original Bennett Hypothesis held that increases in financial aid will lead to higher tuition, but the empirical evidence testing the hypothesis is inconclusive. The next generation of the concept, Bennett Hypothesis 2.0, adds three refinements.

1. All Aid is Not Created Equal

2. Selectivity, Tuition Caps, and Price Discrimination are Important

3. Don’t Ignore the Dynamic Story

These three refinements not only help explain the mixed empirical evidence, but also provide a better understanding of the relationship between financial aid and tuition. While the first two refinements weaken the link between the two (lessening our concern about Bennett Hypothesis 2.0), the third refinement strengthens the link, implying that we should almost always be concerned about financial aid leading to higher tuition. Given the current structure of the higher education system, Bennett Hypothesis 2.0 implies that the government will always be fighting a losing battle to increase access to college or improve college affordability since “additional government [financial aid] funds keep providing revenues that, under the current incentive system, increase costs.”54 As higher financial aid pushes costs higher, it inevitably puts upward pressure on tuition. Higher tuition, of course, reduces college affordability, leading to calls for more financial aid, setting the vicious cycle in motion all over again.

Bennett Hypothesis 2.0 exacerbates rather than causes out of control spending by colleges, the ultimate cause of which is Bowen’s Rule. Nevertheless, that is no excuse for ill-designed financial aid programs to pour fuel the fire. As Bennett noted:

Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.”55

Those words remain just as true today as they were a quarter century ago.

A couple of questions. First, has anyone ever looked at how efficient the academic world is in spending current resources?  Second, is the current institutional model one that works? Should there be changes in the institutional model?

There is no simple answer to the question of why college tuition has risen so fast, but it is time to look at the college as an institutional model and to ask whether there could be a more efficient institutional structure. See, Can free online universities change the higher education model?

Dr. Wilda says this about that ©

One Response to “Is federal student aid the cause of rising tuition?”


  1. Is federal student aid the cause of rising tuition? « drwilda | Higher Education Journal - June 12, 2012

    […] for-profit schools whose students don't receive any aid. Aid-eligible … … More: Is federal student aid the cause of rising tuition? « drwilda ← Political Animal – Romney's Educational Tax […]

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