Federal Financial Aid Drives Up Tuition and College Costs, Study Finds

From Hans Bader of CEI. 

"The federal government is now admitting that its own financial aid is partly to blame for rising tuition, reports Blake Neff in The Daily Caller:

A new report by the Federal Reserve Bank of New York has found that the massive investment in grants and student loans by the federal government is a major contributor to the unbridled growth in the cost of attending college.

College tuition rates have consistently risen faster than inflation for some 25 years. One theory for the rise, dubbed the “Bennett hypothesis,” was put forward by Ronald Reagan secretary of education William Bennett, who argued that hikes in government student aid simply gave colleges a free pass to hike tuition.

Now, the New York Fed’s research suggests there’s some merit to the idea, and that it means the government could be spending billions on education to no effect.

“While one would expect a student aid expansion to benefit recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect,” the paper concludes.

On average, the report finds, each additional dollar in government financial aid translated to a tuition hike of about 65 percent. [maybe that should be 65 cents-CM] That indicates that the biggest direct beneficiaries of federal aid are schools, rather than the students hoping to attend them.

As Neff notes, this finding is consistent with some earlier studies on the subject, such as a 2012 paper by Harvard and George Washington University economists, and a 2007 paper that found that higher Pell Grants drove up tuition at private schools as well as out-of-state tuition for public schools.

Earlier, Andrew Gillen, research director of the Center for College Affordability and Productivity, also reached the conclusion that federal financial aid fuels college tuition increases. In a colloquy on Gillen’s research, I concurred in this conclusion, while also noting that increased federal regulation has also fueled tuition increases—as have rules and red tape imposed by states and accreditation agencies. (A recent report by college presidents notes that under the Obama administration, the Education Department has flooded the nation’s schools with new rules that have never been properly vetted or codified, in violation of the Administrative Procedure Act.)

Education analyst Neal McCluskey of the Cato Institute cited four additional studies showing that increased government spending on student aid results in large tuition increases.

In 2011, Virginia Postrel wrote at Bloomberg News about how federal subsidies intended to make college more affordable have instead encouraged rapidly rising tuitions."