Tag: Bennett Hypothesis

Yet More Empirical Evidence That Yes, Federal Student Aid Fuels College Price Inflation

For a few years, I have been posting an evolving list of empirical studies that have found that federal student aid programs help fuel rampant college price inflation. Why? Because I continually encounter people, often who work for or in higher education, who insist that there is no meaningful empirical evidence of big subsidies enabling big price increases, even if the possibility makes mammoth intuitive and theoretical sense.

A few days ago a new entry arrived for the list, a paper from the Federal Reserve Bank of New York. It finds that student loans have big inflationary effects, especially at four-year private schools not focused on top academic performers, and that Pell Grants have smaller direct effects, but also likely lead to reductions in aid funded by institutions. It is yet one more study that shows that, contrary to the hopes of the American Council on Education–the premiere higher ed advocacy group–the inflationary effect of student aid is absolutely a subject that should “play a major role” in discussions about college affordability.

And now, the updated list:

David O. Lucca, Taylor Nadauld, and Karne Shen, “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs,” Staff Report No. 733, July 2015.

Dennis Epple, Richard Romano, Sinan Sarpça, and Holger Stieg, “The U.S. Market for Higher Education: A General Equilibrium Analysis of State and Private Colleges and Public Funding Policies,” NBER Working Paper No. 19298, August 2013.

Lesley J. Turner, “The Incidence of Student Financial Aid: Evidence from the Pell Grant Program,” Columbia University, April 2012.

Stephanie Riegg Cellini and Claudia Goldin, “Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges,” NBER Working Paper No. 17827, February 2012.

Nicholas Turner, “Who Benefits from Student Aid? The Economic Incidence of Tax-Based Federal Student Aid,Economics of Education Review 31, no. 4 (2012): 463-81.

Bradley A. Curs and Luciana Dar, “Do Institutions Respond Asymmetrically to Changes in State Need- and Merit-Based Aid? ” Working Paper, November 1, 2010.

John D. Singell, Jr., and Joe A. Stone, “For Whom the Pell Tolls: The Response of University Tuition to Federal Grants-in-Aid,” Economics of Education Review 26, no. 3 (2006): 285-95.

Michael Rizzo and Ronald G. Ehrenberg, “Resident and Nonresident Tuition and Enrollment at Flagship State Universities,” in College Choices: The Economics of Where to Go, When to Go, and How to Pay for It, edited by Caroline M. Hoxby, (Chicago, IL: University of Chicago Press, 2004).

Bridget Terry Long, “How Do Financial Aid Policies Affect Colleges? The Institutional Impact of Georgia Hope Scholarships,” Journal of Human Resources 30, no. 4 (2004): 1045-66.

Rebecca J. Acosta, “How Do Colleges Respond to Changes in Federal Student Aid,” Working Paper, October 2001.

Our Greedy Colleges

Two publications addressing college costs caught my eye in the last 48 hours. Both undermine the notion that college prices have skyrocketed almost exclusively because state subsidies to schools have plummeted.

The first piece, however, is actually supposed to make the opposite point.

You might recall my previously taking exception to statements by Terry Hartle, senior vice president of the American Council on Education, in which he asserted that there is no meaningful evidence that federal student aid drives tuition inflation, and that price increases are almost entirely a result of decreasing state appropriations to public colleges. Yesterday, Hartle and ACE’s Bryan Cook published a chart in a publication titled “Myth: Increases in Federal Student Aid Drive Increases in Tuition” that supposedly illustrates that it is indeed state budget cuts, not colleges’ ability to rake in money through aid, that explains tuition inflation.

Now, I wouldn’t say that aid “drives” prices, but I would say that aid fuels inflation by enabling schools to greatly increase tuition. I am also not aware of anyone arguing that an increase in aid leads to an immediate, one-for-one spurt in prices; instead, aid enables prices to rise over time. And it is not only federal assistance that enables prices to balloon—though Washington is the biggest aid source—but also state aid, scholarships, etc. And no one says that aid is the only factor involved in price increases; undoubtedly state subsidies matter for public colleges. So to a large extent the argument that federal aid doesn’t fully and immediately drive prices in public colleges attacks a strawman.

With all that in mind, what does ACE’s graph reveal about the declaration that state subsidy cuts are the real culprit behind rapidly rising college prices? It shows that there’s much more to the story. And I’m not even talking about the near-total inability of ACE’s preferred bogeyman to explain private college tuition.

I haven’t been able to track down the source of ACE’s data, so I can’t reproduce the graph here, nor can I do better than eyeball where each point lies. But by my viewing, there are only two academic years in which colleges’ per-capita tuition increase simply made up for state-subsidy losses: 2004-05 and 2010-11. Every other year tuition rose well in excess of subsidy losses, ranging from a 1 percentage point net gain in 1992-93 to 7 points in 2007-08.

So even by ACE numbers, our supposedly beleaguered public colleges actually look pretty greedy. And what likely enables that greed? The ability of students to cover price increases with aid.

But don’t just take my word, or ACE-supplied evidence, for this. Ask a professor:

Academic economists like to make fun of businesspeople: they want competition when they enter a new market but are quick to lobby for subsidies and barriers to competitors once they get in. Yet scholars like me are no better. We work in the least competitive and most subsidized industry of all: higher education….

Just as subsidies for homeownership have increased the price of houses, so have education subsidies contributed to the soaring price of college. Between 1977 and 2009 the real average cost of university tuition more than doubled.

These subsidies also distort the credit market. Since the government guarantees student loans, lenders have no incentive to lend wisely. All the burden of making the right decision falls on the borrowers. Unfortunately, 18-year-olds aren’t particularly good at judging the profitability of an investment without expert advice, and when they do get such advice, it generally counsels taking the largest possible loan…

Last but not least, these subsidized loans keep afloat colleges that do not add much value for their students, preventing people from accumulating useful skills.

Those are the words of University of Chicago professor Luigi Zingales in a piece in yesterday’s New York Times. It’s a nice bit of truth-telling because it comes from within academia, not without. The article is also important because it goes on to discuss a way of lending that makes sense for lender, borrower, and taxpayer: “equity contracts,” or what a 2002 Cato report called “human capital contracts.” Basically, borrowers would repay lenders by giving them an agreed-upon percentage of their future income, and all government would do is enforce the contracts. That would enable borrowers to avoid the big problem of having a set amount due often before they have the ability to repay, and it would greatly increase the efficiency of college financing, with lenders likely to be quite discerning about who really would benefit from college.

Unfortunately, that sort of efficiency is something colleges—even, it seems, public ones!—almost certainly don’t want. They love making money, and do it most easily when government gives out dollars like water.

These Reports Prove Aid Doesn’t Fuel Tuition Inflation…Except They Don’t

Today we are once again treated to a declaration that there is simply no way the crazy Bennett Hypothesis – the theory that student aid helps fuel college price inflation – is true. This time, the end-all-debate pronouncement comes from David L. Warren, president of the National Association of Independent Colleges and Universities, who cites three apparently definitive reports as proving aid is not “driving up” costs.

Aside from the problem that the argument is really that aid fuels price increases rather than driving them – the aid is the gasoline, the colleges the car drivers – what do the studies offered by Warren really tell us?

First is the 2001 federal report everyone who wants to declare the Bennett Hypothesis dead loves to cite: “Study of College Costs and Prices, 1988-89 to 1997-98,” from the National Center for Educational Statistics. As Warren accurately cites, the report does say:

Regarding the relation between financial aid and tuition, the regression models found no associations between most of the aid packaging variables (federal grants, state grants, and loans) and changes in tuition in either the public or private not-for-profit sectors.

But, then, it also says this:

[T]here are considerable data limitations in these models: for example, the availability of only one year of financial aid data and a lack of comparably recent financial data (especially for private not-for-profit institutions). IPSFA data on loans include all sources of student loans; federal subsidizedand unsubsidized, institutional, and private loans cannot be disaggregated. In addition, the IPSFA aid variables focus on the packaging of various forms of student aid in terms of the percentage of students receiving aid and the average amount received, and therefore cannot be used to explore the possibility of a revenue interaction at the institutional level between federal aid and institutional aid. Due in large part to the accounting standards used by the institutions themselves, information on financial aid collected through the IPEDS system for the available years is incomplete, especially regarding student loan volume, which cannot be isolated from tuition revenue in the IPEDS Finance survey data. Finally, financial data such as instruction expenditures cannot be isolated to undergraduate students, making any comparison with undergraduate tuition inexact.

Essentially, the report contains a regression based on a change in student aid for just one year and can’t adjust for a whole bunch of important things. In other words, it tells us little and in no way closes the door on Bennett.

Next, Dr. Warren cites a February 1998 commission report in which the commission purports not to have found any evidence that student grants effect college prices, and no “conclusive” evidence that loans enable rising prices. Then again, the Commission did no meaningful empirical analysis of the question, and as dissenting member Francis McMurray Norris objected, “issues such as tenure, cost and value of research, duplication of facilities, teaching loads, and relationship of student loan programs and rising costs have not been addressed.” [Italics added]

Grounds for putting the Bennett Hypothesis in a pine box? Hardly.

Finally, Dr. Warren cites a 2011 GAO report that looked only at the effect of an increase in the federal student loan limit for first- and second-year students, and only tracked three years of prices and enrollment. It concluded that enrollment and prices rose at rates generally consistent with recent “prior years.” Of course, looking at the effect of such a narrow change in overall aid over such a short time period without controlling for myriad variables that impact prices tells us basically bupkis.

The fact is that several empirical studies do show student aid enabling schools to raise their prices, and I have listed many of them. It is also the case, as most studies point out, that it is very difficult to definitively isolate the effects of aid when so many factors – from school type to student characteristics – are in play. That’s when basic logic also has to come in: People in colleges are like everyone else, and will be happy to take more money if it’s available. Aid makes it available.

One thing that cannot be supported is insisting, as Mr. Warren does, that we know for certain there is no connection between student aid and rising prices. That is something that truly has been disproven.