Report: Is Federal Financial Aid the Cure or the Culprit for High Tuition?
By Allie Bidwell, Communications Staff
Everyone has their opinion about what’s caused the sharp increase in college tuition over the last several decades.
Some say it’s clear that state disinvestment in higher education led to the increase, while others steadfastly claim it’s due to "administrative bloat" and faculty salaries. But according to a new working paper from the National Bureau of Economic Research, federal financial aid is the true culprit.
Between 1987 and 2010, the authors write, sticker price tuition and fees grew by nearly 120 percent, from $6,600 to $14,500 in 2010 dollars. After subtracting institutional aid, net tuition and fees still grew by 78 percent. Meanwhile, state and local funding for higher education fell while the cost of delivering an education continued to increase.
While those other factors certainly had a hand in the increase in tuition, it’s the demand shares –– namely increases in financial aid –– that "account for the lion’s share of the higher tuition," wrote Grey Gordon of Indiana University and Aaron Hedlund of the University of Missouri, the authors of the paper.
When the Higher Education Act was reauthorized in 1987, and again in 1992, for example, annual and aggregate limits to the subsidized Stafford loans were increased. The 1992 reauthorization also brought about the supply of unsubsidized Stafford loans, and increased annual PLUS loan limits. The idea that increasing and expanding federal student aid programs allows institutions to hike up tuition is commonly referred to as the "Bennett Hypothesis," after William Bennett, the education secretary under Ronald Reagan.
Overall, Hedlund and Gordon write in the paper (which focuses on nonprofit institutions) that expansions in borrowing limits accounted for 40 percent of the tuition jump, representing “the single most important factor” in the increase. Increase in grant aid, they said, accounts for another 17 percent.
While the paper casts doubt on the idea that rising salaries are a driving factor in tuition increases (known as Baumol’s “cost disease”), it doesn’t entirely rule out that theory, nor the idea that state disinvestment has had an impact on tuition. In the end, they write, some factors matter more than others depending on the type of institution.
The paper gives strength to the Bennett Hypothesis, coming not long after the Federal Reserve Bank of New York claimed institutions increase tuition by about 65 cents for every dollar increase in federal student aid. Still, some see arguing against expansions to financial aid as arguing against increased access to higher education.
Hedlund and Gordon wrote that they plan to continue drilling down into the issue by examining the financial aid-tuition relationship at different types of institutions.
Publication Date: 2/12/2016
Joseph S | 2/12/2016 3:51:56 PM
While I am not an economist, it would seem that over the years, while the financial aid dollars have increased substantially, so too have the costs of higher education at many an institution. And while the additional support was needed by many of the students receiving the Pell Grants, thee were many who took loans above and beyond that which they could ever handle. it oftentimes seems as if the system is broken, for how many more dollars must be added to the federal budget to support higher education. It really is time for a very high level national meeting of presidential organizations and associations, presidents of colleges and universities, and family representatives to address the issue.
Donna F | 2/12/2016 3:25:14 PM
When you increase tuition or the COA you will more students eligible for the Subsidized Stafford loan. What happen to the days when the Guaranteed Student Loan was based on the AGI of a family ($30,000) instead of a student having financial need. If the student attends a high priced school the more students will be eligible for Subsidized Stafford loan. The taxpayers are footing the bill for subsidizing interest for students who attend high price schools. Maybe this is also why tuition has increased.
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