Recent economic research suggests that colleges siphon off a significant portion of federal education aid rather than lowering costs to students
President Obama is holding thinly-veiled campaign events at college campuses around the country touting his plan to retain low interest rates on federal student loans. Amidst the debate over whether a temporary 3.4 percent interest rate passed in 2007 should be retained and, if so, how to pay for it, a far more important question has been ignored:
Who really benefits from the $65 billion-plus that Washington spends each year on student aid?
Recent economic research suggests that colleges siphon off a significant portion of federal education aid rather than lowering costs to students. Simply put, much of federal student aid is corporate welfare for colleges.
WHO REALLY GETS THE MONEY?
Annual earnings for bachelor's degree holders are $30,000 higher than for high school graduates, making a college diploma a prerequisite for entrance to the middle class. But as the College Board reports, from 2001 through 2011 tuition for public colleges increased by an average of 5.6 percentage points higher than inflation, while private college tuitions rose 2.6 percent above inflation. Tuition, housing and other expenses at public institutions today tops $21,000 per year. Double that if you want to attend a private college.
In response to rising tuition costs, federal aid such as Pell Grants, work-study programs and tuition tax credits have more than tripled over the last decade, reaching $65 billion in 2011. Washington also made over $100 billion in subsidized student loans last year.
But is all this college aid actually making college more affordable? At first glance, the answer is obviously yes. But there's an alternative story, in which colleges and universities can siphon off a portion of federal education dollars. Economists would term this a question of the "incidence" of federal aid, of who ultimately benefits from it.
The most obvious way that colleges might capture federal student aid is by raising tuition. Research to date has been inconclusive, but Stephanie Riegg Cellini of George Washington University and Claudia Goldin of Harvard have provided compelling new analysis. Cellini and Goldin looked at for-profit colleges, utilizing the key distinction that only some for-profit schools are eligible for federal aid. Riegg and Goldin find that that aid-eligible institutions "charge much higher tuition ... across all states, samples, and specifications," even when controlling for the content and quality of courses. The 75 percent difference in tuition between aid-eligible and ineligible for-profit colleges -- an amount comparable to average per-student federal assistance -- suggests that "institutions may indeed raise tuition to capture the maximum grant aid available."
HOW COLLEGES EAT YOUR AID
An alternative way that colleges can capture federal aid is by reducing their own student assistance. This is a particularly effective approach, since students receive widely differing amounts and are unaware of what they might receive in the absence of federal assistance.