Rising college tuition has stoked the ire of students, families as well as politicians, and a surprising cause may be partially to blame: Expanded access to money to pay for school from the federal government.
For every extra dollar available to students in subsidized federal aid, colleges raise tuition by an estimated 65 cents on average, according to a staff report released by the Federal Reserve Bank of New York last week. The paper, which studies tuition patterns following Congress’ decision to increase borrowing limits in the mid 2000s, provides some insight into a question economists and higher education experts have debated for years — whether boosting access to federal aid incentivizes colleges to raise prices by giving students more ways to pay for school.
“It’s a pretty simple economic theory that if you have access to more money you’re probably going to be willing to pay for more for something,” said Eric Best, a professor at Jacksonville State University who co-authored the book “The Student Loan Mess: How Good Intentions Created a Trillion-Dollar Problem” with his father, Joel.
William Bennett, the Secretary of Education from 1985 to 1988, is probably the public figure most associated with this theory, which came to be known as the “Bennett Hypothesis” after Bennett argued in 1987 that increases in federal financial aid “have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.”
The notion is controversial, particularly given conventional wisdom dictates that increasing access to federal financial aid in turn increases access to college. Research on the topic has been somewhat of a mixed bag — the Government Accountability Office concluded last February that “it’s difficult to establish a direct relationship” between increased federal student loan limits and increased tuition.
The New York Fed paper highlights two factors that point to “a modest relationship” between raising federal loan limits and tuition hikes, according to Robert Kelchen, an education professor at Seton Hall University in South Orange, N.J. For one, researchers found that the stocks of for-profit college companies saw cumulative abnormal returns of nearly 10% around the time Congress passed the increase in federal student loans — a signal that investors expected these companies to raise tuition in response to the boost in aid, according to Kelchen.
The researchers also note that the relationship between increases in federal aid and rising tuition is most pronounced at expensive, private schools that aren’t particularly selective. These schools may be more likely to respond to changes in loan limits because unlike their wealthier, more selective counterparts, they can’t rely on their endowments for funding.
These are also the schools most likely to raise prices in an effort to appear more renowned, Kelchen said. That means that when a loan limit increase gives them the opportunity to boost tuition without scaring away students, these schools probably will. “In higher education, one of the ways you become more prestigious is by raising tuition,” Kelchen said.
Still, there are some limitations to the research, including the fact that it’s difficult to untangle other reasons for tuition increases such as growing administrative costs and cuts to state funding from the effects increases to the federal borrowing limit.
Even if you accept the premise that increased access to federal aid influences tuition hikes, it’s likely a relatively small factor. At about $875, the increases to federal loan limits are so small compared to tuition hikes that there’s likely more at play, Kelchen notes. The researchers note that the findings don’t outweigh the benefits of the federal loan program, which can help fill the gap between parent contributions and the cost of college for many students who need the degree to get a well-paying job.
“If students couldn’t get any money from the federal government, tuition [fees] would probably go down,” Kelchen said. “But it’s hard to say how much.”