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.
Writing in the Economics of Education Review, Nicholas Turner, a Treasury Department economist on leave from the University of California, analyzed colleges' responses to student eligibility for tuition tax credits. Programs such as the American Opportunity Tax Credit allow up to $2,500 tax credits for tuition costs, a benefit that flows mostly to the middle class. Turner found that roughly four-fifths of the benefit students receive from tuition tax credits is lost through reduced student aid provided by colleges.
Pell Grants focus more on lower-income households. Lesley J. Turner, a doctoral candidate in economics at Columbia University, analyzed how institutional aid changed as students became eligible for Pell Grants. She found that, on average, "institutions capture 16 percent of all Pell Grant aid." However, important differences exist. Public colleges and universities garnered very little Pell money. But selective private colleges -- the ones parents really want their kids to attend -- claw back 79 percent of the value of Pell Grants.