Bennett Hypothesis: Financial Aid Increases Tuition

[sanantone]

The Bennett Hypothesis says that increases in financial aid leads to increases in tuition. 

I mads this new thread since the discussion was off topic. Dfrecore linked to a Federal Reserve report that concludes that increases in aid lead to increases in tuition. There are some issues with that report. 

One of the co-authors admitted that it is hard to determine if the Pell Grant and unsubsidized loans affect tuition at all. The study only found a marginal correlation between subsidized loan availability and tuition increases at for-profit and private, nonprofit schools. There is a stronger correlation between decreased state aid and tuition increases at public universities. 

We all know know that correlation does not equal causation. Some universities started admitting more out-of-state and international students leading to increased tuition averages. 

https://www.usnews.com/opinion/articles/...c-colleges

After looking at several studies, there appears to be no consensus on whether or not increased financial aid availability leads to higher tuition rates. However, many studies point to for-profit colleges being disproportionately responsible for increases in student loan debt and default rates.

[cookderosa]

This is an example of academic-ing something to death at the cost of common sense and observation.

This is econ101.

Give people access to money, people have more spending power. People with spending power spend more. Increased demand drives prices up. When demand drops, prices drop.

[sanantone]

More people started attending college when financial aid became available. So, you're saying that the solution is to give fewer people the chance to attend college?

One of the theories is that the cost of college has actually gone up due to increased labor costs. If the demand for professors and instructors goes up, then you have to pay them more. The cost of providing healthcare to employees has also gone up. Placing the blame solely on financial aid seems kind of lazy. Supply and demand doesn't only work on that end.

Here is some more common sense. When states reduce subsidies, then colleges have to increase tuition rates. It doesn't get any simpler than that.

Here's even more common sense. The increase in student loan debt is correlated with the increased popularity of for-profit colleges and online programs.

And, some more common sense. Financial aid has been around for longer than I've been alive, but the dramatic increases in tuition are relatively recent and got worse during the Great Recession when state funding had to be cut.

If supply and demand were really that simple, then why are wages growing so slowly when unemployment is so low?

[davewill]

This is one of the reasons I prefer a robust public college system with low or even free tuition to aid that can be spent at private institutions. Make public colleges affordable, and it puts downward pressure on tuition rather than upward.

[videogamesrock]

You can also use inflation to explain the rise in the cost of tuition. When you increase the money supply the cost of goods increases, in case of tuition, the increase in money supply through easy to obtain loans increased tuition prices.

The same goes for home loans, as the loans are easier to obtain the demand for houses increases with the increased money supply. We saw this when government regulation increased the quotas for loans for lower income borrowers, it caused housing to inflate beyond normal prices.

Regarding wages I see two issues, heavy government regulation in industries that discourage competition due to the high cost of regulatory burden that smaller firms can’t afford which prices them out. Of course a large pool of low skilled workers through illegal immigration creates a problem for entry level workers often delaying employment for younger workers ages 16-24. Although education is important so is experience at those ages. When someone has no work history the only thing they have to offer of value is their willingness to work for low wages, when that pool of applicants is larger than normal, many are priced out or must wait for employment therefore delaying their ability to climb the ladder.

[dfrecore]

Actually, the rise in tuition prices at greater than the inflation rate started in 1980, after the government greatly expanded subsidies. This was WELL before the recession.

The Bennett Theory says in part: "In 1980, college tuitions began rising year after year at a rate that exceeded inflation. Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible."

It's not a coincidence that after the government started something, there were unforeseen issues that arose from that. As usual. The government seems to specialize in that sort of magical thinking that whatever they do, only good things will happen.

But I agree that this is simple economics. Just like the housing bubble was caused by the government loosening restrictions and forcing banks to give loans to people who weren't otherwise qualified for them, the tuition bubble is the same. Easy money to people who can't show that they can repay the loans causes problems.

And no, making it cheaper for people to go to college was not a terrible idea - but letting them take out more in loans WAS a terrible idea. There were better ways to make it less expensive (here in CA we pay $46/cr for CC, there are agreements between every CC and every 4-yr state school to create a less expensive path to that school, and our CSU system is one of the cheapest in the nation, at around $7500/yr - so it's possible). The key is, states get to decide how much they want to subsidize college tuition. Our state has made it a priority, some states don't. But, we have WAY more control of how much our state spends, and can vote people out of office if we don't like their policies, than we do over the national government.

[alexf.1990]

More people started attending college when financial aid became available. So, you're saying that the solution is to give fewer people the chance to attend college?

One of the theories is that the cost of college has actually gone up due to increased labor costs. If the demand for professors and instructors goes up, then you have to pay them more. The cost of providing healthcare to employees has also gone up. Placing the blame solely on financial aid seems kind of lazy. Supply and demand doesn't only work on that end.

I doubt that a significant portion of tuition goes towards a professor's salary. Most undergrad courses are taught by unpaid TAs or adjunct professors who are paid next to nothing.

Here is some more common sense. When states reduce subsidies, then colleges have to increase tuition rates. It doesn't get any simpler than that.

This accounts for a part of the problem. I don't think that states have reduced subsidies so much as to cause a significant portion of the astronomical rise in tuition rates. For example, if states used to subsidize 75% of tuition rates and then reduced it to zero, you'd only see a 4 fold increase in tuition rates. What we've seen over the last couple of decades is significantly higher than that.

Here's even more common sense. The increase in student loan debt is correlated with the increased popularity of for-profit colleges and online programs.

These for-profit programs certainly cost more. It's hard to say that as many people would attend but for the easy access to loans.

And, some more common sense. Financial aid has been around for longer than I've been alive, but the dramatic increases in tuition are relatively recent and got worse during the Great Recession when state funding had to be cut.

That's factually inaccurate. Tuition increases between 2007-2018 for public universities only rose 2.4% per year, compared to 3.3% from 1987-1998. https://trends.collegeboard.org/college-...ges-decade


If supply and demand were really that simple, then why are wages growing so slowly when unemployment is so low?

This is because of the way unemployment rates are calculated. Only those actively seeking work are counted among the unemployed. The percent of the population that is in the labor market is still at pre-recession levels. In the long term, wages have been stagnate because of supply pressures from incoming low-skill immigrants, automation killing low-skill jobs, and off-shoring of manufacturing. We have a surplus of "button pushers."

[videogamesrock]

The main question one must ask; why can StraighterLine charge $60 for a course that the college will charge $700 for the same course? It is because SL doesn't have access to the same FAFSA that the colleges have and therefore the free market determines their prices. If FAFSA would be available for SL courses the prices would go up.

[dfrecore]

I would like to point out that you are absolutely correct about for-profits - and that if the government hadn't stepped in and made loans so easy to get, there probably wouldn't be any for-profits, as there wouldn't be much profit to be made! If people can only go where they can afford to go, then the less expensive schools will flourish, and the more expensive ones would die off.

Then, leave the subsidies to the states to deal with, and see what happens. The market will take care of a lot of the problems if allowed to. That's why capitalism (not crony capitalism, but actual capitalism) works. If many people are demanding inexpensive colleges, inexpensive colleges will come about. No frills, no fancy dorms with granite counters and a pool and a gym with a juice bar, no billion dollar stadiums and arenas, etc. Kind of like CC's. There would be inexpensive private schools with limited degrees, no frills, nothing fancy - just there to get the job done (kind of like WGU or Patten). And not only online, but B&M. Or the states would expand the CC's to offer BA/BS degrees - as CA has done on a limited basis. One of our local CC's offers a BS in Biomanufacturing (because none of the local state schools offer it, and we have a large Biotech industry here). The total cost for 4 years is about $11,000 total ($1500 for first and second years at $46/cr, and $4000 for 3rd and 4th years at $130/cr). They are doing this as a trial with multiple CC's in CA, in different parts of the state, each offering a degree that the local state schools don't. THIS is how capitalism is supposed to work.

[cookderosa]

More people started attending college when financial aid became available. So, you're saying that the solution is to give fewer people the chance to attend college?

That's probably the core of where you and I disagree. You and I disagree on what it means to have a "chance to attend college." You assume funding is wrapped in the chance, whereas I do not. Having a chance to attend is separate and apart from paying for the thing you have a chance to pursue.