Report Examines Impact of Federal Student Aid on Tuition Increases

By Charlotte Etier, Senior Research Analyst

In a report released last week, the Federal Reserve Bank of New York presented preliminary findings on the impact of increased student loan funding on tuition between 2008-10. Through a highly technical analysis of detailed student-level financial data and changes in federal student aid programs the report, Credit Supply and the Rise in College Tuition: Evidence from the Expansions in Federal Student Aid Programs, estimates that tuition sticker prices increased due to a:

  • 63 percent of an increase in subsidized loan amounts;
  • 40 percent of an increase in Pell Grants; and
  • 25 percent of an increase in unsubsidized loan amounts.

According to the report the tuition-loan sensitivity is highest among top-quartile tuition institutions.

The analysis also shows that sticker price increases at for-profit institutions are higher than at non-profits, and that there was a large abnormal stock market response to the analyzed Higher Education Act (HEA) changes.

This report uses data from three main Department of Education (ED) sources: the Integrated Postsecondary Education Data System (IPEDS), Title IV Administrative Data from ED’s Federal Student Aid (FSA) office, and the restricted-use student-level 2004 National Postsecondary Student Aid Survey (NPSAS:04). These sources are combined into a nationally non-representative sample of 790 institutions between the 2000-01 and 2011-12 academic years. In addition to their findings on federal loans the paper also attempts to analyze the impact of changes in federal aid on changes in institutional grants and growth of undergraduate enrollment. To do so data from NPSAS:04 and NPSAS:08 were used along with data from IPEDS and find, as with Pell Grant effects, the impacts of institutional grants are not statistically strong.

The premise for this report is built around recent research comparing the shared features of the housing market to that of postsecondary education. According to the researchers these features include:

  • Credit playing a key role in U.S. postsecondary education
  • Student loans, much like housing finance, are often originated through government-sponsored programs

Based on these similarities this report attempts to examine what, if any, effect the student loan credit expansion has had on the cost of postsecondary education. In addition to shared features with the housing market, this report utilized the hypothesis postulated in 1987 by William Bennett which argues that “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.”

What are your thoughts about the impact of federal student aid on higher tuition sticker prices? Let us know in the comments section below.


Publication Date: 7/13/2015

Donna F | 7/14/2015 8:34:40 AM

National PELL expenditures due to high sticker prices are not the greatest impact to the tax payer. The majority of 4 year schools exceed 5775 in tuition. It is the Subsidized loan program (63% increase) that is costing the tax payers to finance the schools that raise their tuition. The subsidized loan program (Guaranteed Student Loan) used to be based on the income of the family. To qualify you had to earn less than $30,000. Now it is based on need and if a school has a high COA then the majority of students will receive the Sub loan. Interest financed by the taxpayer while the student is in this high priced school.

Eileen O | 7/13/2015 3:45:56 PM

I agree with the prior commenter. Since nearly all colleges, including very low cost community colleges, have COA's at or above the $5775 minimum, the higher tuition charges would have no effect on increased federal expenditures on Pell. Only increased enrollment or in this case, a great recession, could result in a 40% increase in Pell expenditures.

Denise D | 7/13/2015 11:42:12 AM

I think the increase in Pell at 40% is highly unlikely unless the increase in tuition was due to an increase in the enrollment level--or the 790 institutions that were surveyed are extremely unrepresentative of the post-secondary institutional population. Most schools' Cost of Attendance figures are already at or above the $5775 minimum to ensure a maximum Pell Grant award, so a tuition increase would have minimal if any effect on the Pell award. Pell awards will go up from year to year as the Pell award maximum increases, yes, but if the Pell schedule stayed the same from year to year I doubt if one could account for more than a percent or two based upon tuition increases.

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