Hello all!  As we close out March, let’s take a minute to ponder what many college students and families undoubtedly find themselves wondering quite a bit—what makes college so expensive(startling fact: student loan debt in America currently tops over $1 TRILLION dollars)?  Over the years, this very question has been asked by everyone from student to parent to economist.  Even today, there is no clear explanation, but many ideas.  Let’s take a look…

A common line of thinking questions the very nature of financial aid itself.  As this idea goes, essentially it is copious amounts of financial aid that most students receive that makes college costs go up (and up and up…).  This perception has actually been around for quite a while, and has a name: the Bennett Hypothesis (after William Bennett, President Reagan’s secretary of education).  It came about in the 1980s and has been considered by many ever since.

According to Bennett, who in his capacity as Secretary of Education visited many colleges and spoke to administrators, colleges have the tendency (and ability) to gradually increase tuition because the financial aid that students receive to pay for school allows them to do it.  Essentially, the more school costs, the more financial aid students will receive to offset the increasing price tag.  The problem this created is twofold: more students need aid due to higher tuition AND student loan debt to get students through school makes it more expensive in the end.

A new paper, by economists at Harvard and George Washington University, examined the effects of financial aid.  For a cleaner comparison, the study looks at for-profit schools—i.e. University of Phoenix, Devry, and the like.  Colleges like these have their choice: accept financial aid or don’t.  So the researchers compared schools allowing financial assistance with those that do not, and found that upon looking at over 2,650 academic programs in three different states, schools that get federal aid have tuition rates that are 75% higher than those who don’t!  Such facts support the notion that tuition increases purely to maximize student aid.

It’s been this way with college as a whole since the ‘80s, folks.  Throughout the 1970s, tuition actually went down.  But in the ‘80s, college education gained importance, Congress called for government assistance for education and such aid forms as the Pell Grant and Perkins Loan were born in the eras of Carter and Reagan.

You might wonder how much tuition is impacted by financial aid, however.  Well, in a 1998 book, The Student Aid Game by economists Michael S. McPherson and Morton Owen Schapiro, the estimate is that public colleges hike up tuition $50 for every $100 given in aid. The match is even tighter with private institutions, as demonstrated in a 2007 study by Larry Singell and Joe Stone: tuition increases match dollar-for-dollar that of distributed aid.

Given all of this, a few ideas have been proposed to remedy to tuition-aid problem, one of which is put forward by President Obama.  In this plan, the goal is to tie financial aid to tuition, motivating schools to keep their tuition rates down to receive federal funding.  Another is the Bennett Hypothesis 2.0, by economist Andrew Gillen, who says aid should only go to those truly in need of it and in the amount they need.  Richard Vedder has seconded Gillen’s plan, adding that (much like performance-based scholarships) aid should be revoked from poorly-performing students.  Still others blame state governments for educational woes, claiming that the gradual loss of state support has left more financial burden on students—though this doesn’t account for private university cost increases.

This plethora of information and debate on the college cost crisis certainly gets your wheels turning, making you wonder what’s really going on in colleges across the country.   Indeed, it might not paint financial aid in the best light, either.  But here’s the thing: it’s the schools themselves that are called into question about tuition here, not just financial aid.  Federal financial aid for students enables them to gain a solid education.  And in terms of loans, they can be tricky little buggers.  When you apply for aid, make sure you understand the terms of the loans and the responsibilities that come along with them.  Plan accordingly in selecting financial aid, and always maximize gift aid—grants and scholarships, as they lesson the cost burden.  And as always, Go Financial Aid will gladly provide solutions to meet your needs.

Categories: Financial Aid | Grants | Scholarships | Student Loans
Tags: cost of education financial aid tuition increase

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