Monday, December 06, 2004

Does Financial Aid Cause Tuition Increases?

I thought of this yesterday and took a look around the web. There seems to be some solid support for the idea, as well as some other relevant observations.

My hypothesis was that the ready availability of large sums of money, primarily loans, could have the same effect as a credit card on consumers' willingness to pay.

The best summary comes from the Heritage Foundation:

Since the [Higher Education Act of 1965]'s inception, Congress has added numerous programs, expanded eligibility to middle- and upper-income students, and increased institutional aid. The rising usage of federal higher education programs by middle-class and wealthy students is costly to taxpayers, contributes to student indebtedness, and fosters greater dependency on the federal government by individuals and institutions. Even more alarming, some researchers have found a link between government loan usage and the rising cost of education.

The HEA was enacted to help low-income students gain access to higher education, but it now subsidizes institutions and higher-income students. Taxpayers - three out of four of whom do not have a bachelor's degree - should not have to subsidize wealthy and middle-class students and college graduates....

Forbes writer Ira Carnahan puts it this way,

Over the past three decades the Federal Government has poured three-quarters of a trillion dollars into financial aid for college students.... So why is college getting less - not more - affordable? One answer seems to be that all those federal dollars have given colleges more room to jack up tuition.... The more cash the government pumps into parents' pockets, the more the schools siphon from them.
The same concerns are addressed in several other articles including Why College Costs Are Rising (John Hood, 1988 - old, but with good detailed analysis)and Does Financial Aid Cause Tuition Increases? (Christopher Shea, Nov. 2003).

There seems to be a significant problem in studying these issues, primarily because of the multitude of pricing factors (is there a Heisenberg Uncertainty Principle in economics?). As a recent college graduate and current law student, I can identify numerous instances of radical inefficiency and unnecessary bureaucracy that perhaps would have been reconsidered if the school had to be financially responsible.

Uncertainty of causation is be a good reason to end or reduce the role of the federal government in education: if these programs were run at the state level rather than the federal, at least we'd have some variations to study.

1 comment:

April said...

Good work. Good economics. We don't really have a Heisenberg Uncertainty Principle, but you have a good point in how hard it is to measure things.