A new economics paper has found that state and federal subsidies for higher education, designed to make college cheaper and more accessible, have driven tuition increases.
Analyzing tuition increases between 1987 and 2010, Professors Grey Gordon and Aaron Hedlund found that changes in financial aid “account for the lion’s share of the higher tuition.”
When effects from financial aid were removed, all other factors only accounted for 16 percent of the net tuition increase.
“These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition,” they wrote.
The hypothesis, named after William Bennett, the secretary of education under Ronald Reagan, states that colleges have been able to increase tuition because more financial aid is available to cover costs.
Gordon and Hedlund note that the economic benefit of a college degree has increased from 58 percent to over 93 percent relative to a non-college graduate. That would push up demand for a degree, as well as the cost, but it is not enough to account for the large increase in tuition.
“Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay,” Alex Tabarrok, an economist at George Mason University, wrote.
Rather than more financial aid and accessibility driving more students to earn a degree, the aid gets absorbed into the price of tuition. Financial aid, according to the model, has driven up debt, not degrees.
“We suspect that our model exaggerates the explanatory power of the demand-side theories as a result of the lack of competition faced by the college,” Gordon and Hedlund wrote, warning that their quantitative findings could be too high. The relationship between higher education subsidies and higher tuition, however, supports the Bennett hypothesis.
When the price of anything becomes cheaper, it becomes more appealing to consumers on the margin. When the federal government will pay more of the cost of college for a prospective student, it becomes a better alternative to work or a different career than it was previously. If demand for a college degree increases, and colleges realize that they can raise tuition without enrollments falling, a price increase is almost inevitable.
Demands for the government to increase funding for higher education, if the Bennett hypothesis holds, will continue to exacerbate the college cost crisis.
