Federal Student Loans Increase Tuition Costs, Studies Show

harvard university

Federal student grants and loans increase the cost of tuition at colleges and universities, a newly published survey of scientific studies concludes.

“In 1987, then-secretary of education William J. Bennett penned an article in the New York Times entitled “Our Greedy Colleges,’” Jenna A. Robinson writes in her research paper “The Bennett Hypothesis Turns 30,” published by the James G. Martin Center for Academic Renewal in December 2017. “In it, he wrote, ‘If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase,’” Robinson wrote.

Evidence ‘Is Compelling’

Robinson’s research merged findings from 25 empirical studies on the Bennett Hypothesis. Fourteen studies, more than half of the total, reported increases in federal aid had a positive effect on increases in tuition. Seven found student aid had no effect on tuition prices.

“Taken together, the research suggests that it is likely that federal financial aid does enable or contribute to increases in tuition, probably to a large degree,” wrote Robinson. “The evidence in favor of the Bennett Hypothesis is compelling. It is most likely that federal financial aid significantly increases the cost of college, possibly across all sectors.”

‘An Ugly Cycle Ensues’

“The theory is really just common sense,” Robinson wrote in an article for the James G. Martin Center summarizing the study. “If the government gives money to students to spend on education, then students will be able and willing to spend more on that product. Universities, knowing that the funds are available, raise tuition without worrying about whether students can afford it. An ugly cycle ensues.”

College tuition has increased faster than inflation for many years, Robinson states in the study. “The price of college tuition and fees has risen 1,335 percent since 1978: much faster than inflation and faster even than medical care (704 percent) and housing (511 percent),” Robinson writes.

Not So Simple?

Michael Rizzo, an economist at the University of Rochester who studies higher education, says it’s unwise to assume too direct a connection between federal student aid and tuition.

“There are many reasons for high and increasing tuition,” Rizzo said. “Subsidizing college increases the demand for college. Whether one would expect a small, large, or negligible effect on tuition depends in a huge way on the underlying elasticity of supply of seats at colleges. I think private schools choose not to expand seats, even though doing so would not be very expensive.”

Rizzo’s theory may explain why not all the studies found aid affected tuition. The Martin Center report says the effect is clearer with student loans than with grants. Pell Grants are often less than the price of tuition and less likely to push it up.

“Going forward, the Department of Education’s main focus should be on Pell Grants to the nation’s neediest students,” Robinson wrote.

Such grants, which are limited in scope and size and meet a true need, are the policy least likely to encourage colleges and universities to raise tuition, Robinson states in her article. Robinson also recommends “skin in the game,” a policy in which universities have to bear some of the repayment costs when students borrow taxpayer money and then drop out. Such a provision is part of a proposed congressional revision of the Higher Education Act.

Far-Reaching Consequences

Thomas Lindsay, director of the Center for Higher Education at the Texas Public Policy Foundation, says high tuition prices affect everyone.

“The tuition hyperinflation under which we have suffered injures not only students, their parents, and college professors, but the American economy as a whole,” Lindsay said. “As William Bennett stated it in 1987, ‘Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.’

“The Martin Center’s recommendations would do much to right the ship,” Lindsay said.  “Universities must share some of the costs of these policies in order to incentivize them to economize on their expenses. Moreover, we must refocus our funding to address the truly needy through Pell Grants, which studies demonstrate are the means of support least likely to cause universities to hike tuitions further.”

Editor’s Note: This article was published in partnership with The Heartland Institute’s School Reform News newspaper. SRN’s managing editor is Teresa Mull and SRN’s senior editor is S.T. Karnick. 

PHOTO: Harvard University in Cambridge, MA. Photo by Ted Eytan.

Jane Shaw

Jane S. Shaw is higher education editor for School Reform News at The Heartland Institute.

Jane S. Shaw joined the Pope Center for Higher Education Policy in 2006 as executive vice president and became president in 2008. Shaw spent 22 years with PERC, the Property and Environment Research Center in Bozeman, Montana, where she was a senior fellow and director of communication. She was named higher education editor for The Heartland Institute’s School Reform News in 2016.

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