New Report: Federal Aid Rarely Affects Tuition Policy at Colleges and Universities
March 21, 2016

A new monograph written for ACE finds little evidence that increases in federal financial aid drive up college tuition, and that institutions rarely rely on federal aid as a rationale to give out less of their own institutional aid.

Authors Richard Archibald and David Feldman use the so-called Bennett Hypothesis as the launching pad for their analysis, released last week at ACE2016, ACE’s 98th Annual Meeting. First advanced by William Bennett, secretary of education in the Reagan administration, the theory suggests that the availability of federal student loans, particularly subsidized loans, provides “cover” for institutions to raise tuition because students can offset any price increase with these loans.

While federal financial aid is something colleges and universities can potentially “tax”—that is, allow increases in federal aid to displace some of the assistance institutions would otherwise have given on their own—Feldman and Archibald find the tax rate is “roughly zero at four-year public universities that educate the bulk of the nation’s students in bachelor’s degree programs.”

The “tax rate” could be higher at highly selective private universities, the authors theorize, because these institutions typically provide substantial grant aid from their own resources that significantly exceeds the aid their students receive from the federal government.

On the other hand, the supposed link between federal aid policy and rising list price tuition is “not obvious at all,” according to their analysis of college pricing behavior.

“The Bennett Hypothesis is probably confined to two kinds of institutions: non-selective private institutions serving primarily low- and middle-income students, and the burgeoning for-profit sector that largely educates older nontraditional students who rely extensively on federal aid to finance their schooling,” they write.

To download a copy of the paper, click here.