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.
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.
There's a very disturbing tendency among academics -- though many people in policy fights do it -- to dodge substantive debate by declaring, basically, "the other side is full of garbage so just ignore them." You probably see it most glaringly about climate change -- no one credible disagrees with Al Gore! -- but I see it far too frequently regarding the possibility that government student aid, the bulk of which comes from Washington, is a significant factor behind college price inflation.
Today, we are treated to this lame dodge in a letter to the Washington Post from Terry Hartle, Senior Vice President at the American Council on Education, arguably the most powerful of Ivory Tower advocacy groups. He writes:
Second, we must do away with one of the most persistent and pernicious myths of higher education: that increases in federal aid drive up the cost of college. Several studies, including two by the Education Department, show there is no link between federal student aid and tuition increases. But there are still those who would have people believe that modest increases in student aid programs are the driving force behind institutions’ decisions about tuition and fees.
I would love to put this "myth" myth to rest. Yes, as I discuss in my recent policy analysis, there are serious challenges in trying to prove that aid fuels price inflation. Lots of variables affect what colleges charge; you need to study long time frames encompassing several business cycles; and you have to account for the fact that aid automatically rises when prices do. So while there is tremendous logical reason to think aid has enabled price inflation -- former college presidents acknowledge as much, basic economics says subsidies drive up demand, etc. -- like any social science there is no definitive proof.
That sure as heck doesn't mean, though, that there isn't any research showing government aid driving price inflation, even if it doesn't prove it. In addition to the incredibly powerful rational reasons to strongly suspect aid plays a big role in out-of-control college pricing, there is, indeed, empirical evidence. For the benefit of the whole debate I offer a smattering of it below, hopefully putting an end to the disturbing denial tactic employed by Hartle and others. Hopefully, but not likely....
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.
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.
Bradley A. Curs and Luciana Dar, "Do Institutions Respond Assymetrically to Changes in State Need- and Merit-Based Aid? " Working Paper, November 1, 2010.
Rebecca J. Acosta, "How Do Colleges Respond to Changes in Federal Student Aid," Working Paper, October 2001.
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).
The College Board is out with its annual reports on college prices and student aid, and the story is pretty familiar. According to The New York Times, the reports reveal that over the last year tuition and fees rose 8 percent at public, four-year schools, and 4.5 percent at private non-profits. Meanwhile, student aid rose at a very fast clip. Indeed, over the last five years, despite lightning-quick growth in sticker prices, after-aid college costs actually dropped.
Now, don't expect to hear this from the College Board or even mentioned in the Times, but doesn't it seem at least plausible that giving more and more aid to students enables schools to raise prices? You know, that colleges might jack up tuition and fees knowing that government, largely, will ensure that students can cover them? It's not only plausible, it's almost certainly the case. But like I said, forget about ever reading that in The New York Times. Instead, we get this standard lament:
“The College Board figures are depressing and utterly predictable,” said Terry Hartle, senior vice president of the American Council on Education. “When states cut funding for higher education, tuitions go up to make up for the difference."
Dealing with this one gets incredibly tiresome, and it should infuriate taxpayers who fund both massive student aid and subsidies to public colleges.
For one thing, of course, cuts in state subsidies don't explain constantly increasing private school costs. Moreover, while no doubt public schools sometimes raise tuition to make up for state funding dips, they also raise it when state funding is going up. Indeed, as this chart from the State Higher Education Executive Officers illustrates, public schools raise prices no matter what is going on with state and local subsidies:
How can schools get away with this? Because students are able to cover the incessantly rising prices. And how can students do that? By using more and more money that comes from someone else!
The data scream this reality so loudly even passed-out undergrads could hear it. So why does it get so little attention? In part, no doubt, because many in the media refuse to even consider that there could be a causal connection between ballooning aid and skyrocketing prices. Even worse, the people controlling the aid see votes, votes, votes from playing education Warbucks. And if, say, the President of the United States can buy votes with student aid, why would he ever admit that his "generosity" mainly just lets higher education bleed taxpayers dry? The unfortunate answer is, he wouldn't.