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Revisiting the Hypothesis That Tuition Rises With Student Aid

The notion that increasing student aid makes it easier for colleges to raise tuition has been debated for years, with the concept being widely attributed to former U.S. Education Secretary William Bennett.

Now Andrew Gillen, research director for the Center for College Affordability and Productivity, a nonprofit Washington-based research center, revisits the theory in his new paper, Introducing Bennett Hypothesis 2.0.

While the paper confirms the basic link between aid and price, it acknowledges the landscape is more complex.

First, Gillen notes that not all aid is created equal. The impact of increased Pell Grants versus widely available Stafford loans differs. In particular, aid programs that are restricted to low-income students are less likely to allow colleges to raise their tuition, writes Gillen.

The paper also examines two common practices within higher education—tuition caps and price discrimination—that Gillen suggests weaken the link between aid and tuition.

"Both result in a tradeoff between increasing revenue and increasing the size of the applicant pool which allows the college to become more selective," he writes. "Because selectively is also valued by colleges, we should not expect for tuition to increase 1 for 1 with aid even when supply is inelastic."

While the first two refinements are minor tweaks in the model, Gillen suggests that the impact of aid on tuition needs to be looked at long term, not just as snapshots in time. While financial aid increases the ability of students to pay college immediately, what happens the next year and the year after that (the dynamic story) is also relevant and much less reassuring, he writes.

"Because most colleges are public or nonprofit, they cannot distribute the money to shareholders, which means that the extra revenue will be spent to improve the institution," according to the paper. "It may hire more professors to conduct more research, to lower class sizes, or to allow teaching loads to be reduced. Or perhaps it builds new laboratories or classrooms, or expands student services to improve its graduation rate. Each of these may be an appropriate expenditure in some cases, but each will also raise the college's costs in the future."

The lesson from "Bennett Hypothesis 2.0" is that there is an overwhelming danger, especially over time, that higher financial aid will lead to higher tuition, says Gillen. Barring an overhaul of the nature of competition in higher education, there are a few other ways to avoid this scenario, he says.

One approach would be to restrict aid to only the very poorest. If aid is only provided to those that were previously priced out of higher education, then colleges cannot raise prices when aid is given without again pricing them out of the market, Gillen says.

"As higher financial aid pushes costs higher, it inevitably puts upward pressure on tuition," the CCAP report says. "Higher tuition, of course, reduces college affordability, leading to calls for more financial aid, setting the vicious cycle in motion all over again."

Rather than causing out-of-control spending by colleges, student aid exacerbates the situation, Gillen concludes.

There are indeed many factors at work. When states cut higher education funding (7.6 percent on average in the most recent reports), it leaves colleges in a difficult position to either make cuts or ask for more money from students.

As policymakers look for ways to get more Americans to finish a degree, the CCAP's related 2010 report, 25 Ways to Reduce the Cost of College, offers some ideas. From encouraging lower-cost alternatives, such as community colleges and dual enrollment, to increasing faculty loads and online courses, the authors suggest some strategies to make higher education more accessible as tuition appears stuck in an upwards spiral.

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