Does Financial Aid Make College More Expensive?

If a college economics class does its job, students will soon realize that even their professors don’t understand why their schools are so expensive. Over the past three decades, college tuition has increased at more than double the rate of inflation. Outstanding student loan debt in the United States now exceeds $1 trillion, a national burden even greater than that of credit cards.

Yet no one agrees on what makes college tuitions so high. Plush state-of-the-art gyms? Classroom technology? The cost of health care, the glut of administrators, too many professors focusing on research at the expense of teaching?

Then there is another theory, one that for 25 years has remained as controversial as it is counterintuitive: that the culprit is federal financial aid. Schools know that students have access to tens of billions of dollars in grants and loans, the thinking goes, and they raise tuition because the aid lets them do it.

This idea — essentially, that federal aid enables college administrators to get greedy — is known as the Bennett Hypothesis, after William Bennett, the conservative thinker who was President Reagan’s secretary of education. Since he first floated it in the 1980s, the Bennett Hypothesis has been debated in economic journals, congressional reports, and popular books. Studies have affirmed it, affirmed it in part, refuted it entirely, kind of refuted it, and many gradations in between.

It is, to say the least, a tough thing to test. And its unruliness stems in part from the colleges themselves. All traditional colleges accept federal aid, and they spend their money in idiosyncratic ways. Is a college public or private? Has its home state just slashed higher-ed funding? How does it fare in the U.S News & World Report rankings? Are there other competing universities nearby? These differences tend to shield the whole issue in opacity.

But a recent study has looked at the effects of financial aid in an unexpected place: for-profit colleges. The for-profit sector — national chains like The University of Phoenix as well as smaller technical institutes — has grown tremendously in recent years, and it offers new and little-examined data on the price of an education. For an economist, the beauty of the for-profit sector is that such schools can choose to either receive federal aid or not, allowing for a cleaner comparison than with traditional schools.

Click through for full article text.


Leave a Reply

Be the First to Comment!

Notify of