Is Financial Aid Really Making College More Expensive?

By Jordan Weissmann

The Obama administration acknowledges that student loans could be behind skyrocketing tuition. But the real link between college costs and aid is complicated.

615 ivy college Thomas Barrat .jpg

Shutterstock / Thomas Barrat

Financial aid, whether it's a cheap loan, a work-study job at the campus library, or a grant, is supposed to make college more affordable and accessible for students. But what if, by handing money out to undergrads, the government is simply encouraging schools to spend more and jack up tuition? 

Meet "the Bennett hypothesis," the dismal notion named for Reagan Education Secretary William Bennett, who suggested it in a 1987 New York Times op-ed diplomatically titled "Our Greedy Colleges." Generous student-aid policies had "enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase," he wrote at the time. "Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible."

Twenty five years of swelling tuition prices later, Bennett's critique seems to have received a stamp of bipartisan approval, courtesy of the Obama administration. It's the driving spirit behind a White House proposal that would condition a small amount of the federal financial aid that colleges distribute to students on their ability to keep a lid on costs. "We can't just keep on subsidizing skyrocketing tuition," Obama told a rally audience at the University of Michigan last month as he announced the idea. 

True enough. Subsidizing skyrocketing tuition sounds like a supremely poor idea. If only it were clear what the link between student aid and college costs actually was.

PUTTING BENNETT TO THE TEST

Researchers have been examining the Bennett hypothesis for decades, trying to figure out whether it holds water. So far, we don't know the answer. Nobody has proved, once and for all, that it's right. But they've found pretty good signs that it might be.

Critics of the idea like to point to a 2001 study prepared for Congress by the National Center for Education Statistics. Although some earlier stabs at the topic had detected traces of the Bennett hypothesis in certain areas of higher-ed, the NCES found absolutely no association between the availability of most types of financial aid, including loans and government grants, and tuition costs. Unfortunately, the study had a lot of limitations. In so many words, the report's authors cautioned that they didn't have the right data or the right theoretical models to arrive at a solid conclusion. 

In the years since, several academics have taken a crack at the problem, and each study has unearthed slightly different answers.  A team from Cornell University, for instance, found that increases in the size of Pell Grant awards, need-based state aid, and the availability of subsidized loans caused public universities to hike up their tuition for in-state students. Out-of-state tuition, however, wasn't affected. 

Those findings clashed with the results of another study, from the University of Oregon, which looked specifically at Pell Grants, one of President Obama's favored forms of student aid. The researchers discovered "little evidence" linking increases in the size of Pell Grants to in-state tuition at public universities. Private schools were a different story. There, increases in Pell aid were "matched nearly one for one" by tuition hikes.

Then there's the for-profit education sector, which may well work on its own set of rules. In a study released this month, professors from Harvard and George Washington University compared tuition prices at for-profit schools where students were eligible for federal student loans to costs at schools where students were not eligible. The researchers estimated that at schools where the loans were available, tuition was roughly 75 percent higher. 

It makes basic sense that if you subsidize something, you'll get more of it. If you give money to consumers, demand rises and prices follow. We're learning that painful lesson every year as healthcare costs soar in this country. But because colleges vary so much in their missions, and how the operate, it may be impossible to make a blanket statement about the affect of aid on their costs. Harvard wants to be the most prestigious university in the world, and may be willing to spend any extra bit of income to do it, whether the money comes from student aid or alumni donations. The University of Wisconsin at Oshkosh wants to give middle class (or aspiring middle class) students a sound education, and might be more inclined to keep costs low, regardless of how much money the government funnels its way.   

The same issue goes for students themselves. Some 18-year-olds and their families might be willing to spend whatever it takes to get a prestigious Ivy League degree. Others just want an education that won't saddle them with too much debt. 

Andrew Gillen of the Center for College Affordability & Productivity has tried to address these issues with a theory he calls The Bennett Hypothesis 2.0. Offering aid to truly needy students isn't a problem, he argues. But when you offer it to students who might otherwise still be able to pay for a college education, you drive up costs. Unfortunately, because of the way the government collects student aid data, it's hard to put that theory to the test. 

So we don't know if Bennett was 100 percent right, but he might not have been totally off the mark either. It's too bad it's taken more than two decades for policy makers to start talking about solutions for a complicated problem. 

This article available online at:

http://www.theatlantic.com/business/archive/2012/02/is-financial-aid-really-making-college-more-expensive/253153/