Profiting From Federal Aid

For-profit colleges that can accept federal financial aid from students charge about 75 percent more in tuition than those that can’t, according to a new study from the National Bureau of Economic Research, which suggests that federal aid might drive up college costs.

While the reasons for higher tuition levels at aid-eligible for-profits are hard to pin down, those colleges “may indeed raise tuition to capture the maximum grant aid available,” wrote Stephanie Riegg Cellini, an assistant professor of public policy and economics at George Washington University, and Claudia Goldin, a professor of economics at Harvard University, the study's authors.

The two economists say their research lends credence to the so-called “Bennett Hypothesis,” a difficult to measure theory attributed to William Bennett, Ronald Reagan’s second education secretary, who alleged that federal financial aid disrupts the higher education marketplace. But unlike Congressional Republicans or Bennett, who have pointed to nonprofit colleges when making that argument to bolster attempts to cut aid programs, the researchers focused on for-profits.

The difference in tuition between the two categories of for-profits “seems to match, pretty well, the size of a Pell Grant,” said Cellini.

The study also found that research about for-profits substantially underestimates the sector’s size. That’s because academics and policymakers generally use federal data to scrutinize for-profits, and ignore the large number of colleges that are ineligible to participate in federal aid programs.

As a result, commonly cited figures from the U.S. Department of Education that for-profits enroll 1.8 million students, or about 10.7 percent of all college students, leave out an estimated 670,000 students who attend for-profits that cannot receive federal aid. That group accounts for 61 percent of for-profit institutions, according to the study, and 27 percent of the sector’s students. Most of the colleges in this group are small, which explains their relatively high numbers and smaller percentage of students.

"The NBER Report only begins to identify the growing diversity of private sector postsecondary institutions in America,” Steve Gunderson, president and CEO of the Association of Private Sector Colleges and Universities, said in a written statement. “This sector will continue to grow in size and delivery forms as we seek to respond to the needs of a 21st Century workforce with enhanced training and educational programs."

The researchers used data from for-profit regulatory agencies in five states: Florida, Michigan, Missouri, Tennessee and Wisconsin. After controlling for program length, enrollment, year of operation and a “rich set of program, county and year-fixed effects,” they compared tuition charged by for-profits that participate in federal aid programs with prices at for-profits that don’t. The study also extended the state data to make national estimates about the industry's scope.

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