The Relationship Between Federal Aid and Tuition

The NY Times Room for Debate forum today asks the questions:

Is there a connection between federal education aid and the inflation rate in higher education? More broadly, what can Washington do, if anything, to improve the effectiveness of its programs and reduce the costs of college?

Richard Vedder opines:

President Obama wants more and bigger Pell Grants to help relieve rising college costs, along with revamped student loan programs. I think he has it backward: federal student financial assistance is more a cause than a consequence of rising college costs.

Work done at my research center reinforces findings of others that exploding student loan programs have contributed to higher tuition charges, and if Pell Grants grow more inclusive and generous, the same effect will occur with them.

The president joins many Americans in wanting to equalize college participation for all. Yet the root cause of low college attainment among poor people is not a lack of resources. It is dysfunctional living arrangements and abysmal academic preparation in our mostly free public secondary schools, particularly those located in inner cities. Indeed, Pell Grant recipients on average are less likely to graduate within six years from college — despite generous financial aid — than others, in large part because of prior educational deficiencies.

It is an inconvenient truth that a larger portion of college students were from low-income backgrounds in 1970, before Pell Grants, than today. No doubt the rise in college costs relative to family incomes makes more believe that higher education is something for the affluent, not everyone. But the cure — federal student aid — is causing (at least in part) the disease.

The demand for higher education grows with rising federal financial assistance, but the supply grows less rapidly, pushing up prices (tuition fees). Supply is comparatively rigid because the so-called best schools attain their lofty reputation by turning away customers: college rankings are enhanced by taking very qualified bright kids who likely will graduate (and are disproportionately affluent). Dropping money out of airplanes over the houses of college students (or its equivalent) is not the solution.

The three “I”s of higher education reform are incentives, information and innovation. Colleges must provide incentives for their staff to want to cut costs and be efficient, they must provide better information on outcomes and finances to consumers, donors and taxpayers, and they must embrace innovation in the forms of labor-saving technology. That, not more student financial aid, is the key to making colleges more affordable.

Arthur Hauptman also offers some interesting analysis:

Unlike Pell Grants, as part of the aid packaging process, colleges have some control over how much students borrow as loan amounts. Moreover, just as one couldn’t imagine house prices being as high as they now are if mortgage financing were not available, it is difficult to believe that colleges and universities could have increased their charges so rapidly over time without the ready availability of students’ ability to borrow.

As does Pat Callan:

But recent increases in Pell Grants during the Bush and Obama administrations and higher levels of federal expenditure for the program have had little, if any effect, on improving college access and affordability. As additional Pell dollars are absorbed by steep tuition increases, the effect is to shift costs from colleges and states to students and the federal taxpayer, with little or no net gain in higher education opportunity.