Friday, February 24, 2012

Does Increased Financial Aid Lead to Higher Tuition?

Former Education Secretary William Bennett said yes. However the empirical evidence is mixed.

Below is the summary of a recent study. However, the study concludes (p.24) that in the case of law schools, the Bennett hypothesis is correct. But in the case of law schools, I am not sure that the  study’s assumptions are correct.

The original Bennett Hypothesis held that increases in financial aid will lead to higher tuition, but the empirical evidence testing the hypothesis is inconclusive. The next generation of the concept, Bennett Hypothesis 2.0, adds three refinements.

 1. All Aid is Not Created Equal

 2. Selectivity, Tuition Caps, and Price Discrimination are Important

 3. Don’t Ignore the Dynamic Story

 These three refinements not only help explain the mixed empirical evidence, but also provide a better understanding of the relationship between financial aid and tuition. While the first two refinements weaken the link between the two (lessening our concern about Bennett Hypothesis 2.0), the third refinement strengthens the link, implying that we should almost always be concerned about financial aid leading to higher tuition.

Given the current structure of the higher education system, Bennett Hypothesis 2.0 implies that the government will always be fighting a losing battle to increase access to college or improve college affordability since “additional government [financial aid] funds keep providing revenues that, under the current incentive system, increase costs.”54 As higher financial aid pushes costs higher, it inevitably puts upward pressure on tuition. Higher tuition, of course, reduces college affordability, leading to calls for more financial aid, setting the vicious cycle in motion all over again.

Bennett Hypothesis 2.0 exacerbates rather than causes out of control spending by colleges, the ultimate cause of which is Bowen’s Rule. Nevertheless, that is no excuse for ill-designed financial aid programs to pour fuel the fire. As Bennett noted:

“Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.”


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