Increases in federal student aid enable colleges to raise their prices, so part of the aid is captured by the institution rather than the student.
William Bennett, then Secretary of Education, made the argument in a 1987 New York Times article, 'Our Greedy Colleges'. The evidence is strongest where colleges depend most on aid: Cellini and Goldin found in 2014 that aid-eligible for-profit colleges charged more than comparable ineligible ones by about the value of the aid, and Lucca, Nadauld and Shen estimated that each dollar of expanded subsidised loans raised list prices by about sixty cents.
In practice
- A for-profit college raises its fees by roughly the size of a grant increase in the year the grant rises.
- A family's larger loan allowance is matched by a larger bill, and the student is no better off.
- Possible explanations
- The explanation is capture: aid that follows the student to whichever institution they choose raises what students can pay, and institutions with pricing power can absorb part of it.
- In its favour
- The evidence is strongest where colleges depend most on aid, with studies finding aid-eligible for-profit institutions charging more than comparable ineligible ones, and estimates of substantial pass-through into list prices.
- Against it
- Studies of public and non-profit colleges often find little effect, and list prices can rise while discounted net prices do not, so the hypothesis holds where aid is a large share of revenue rather than generally.
- Standing
- Studies of public and non-profit colleges often find little effect, and list prices can rise while discounted net prices do not. The hypothesis holds best where aid is a large share of a college's revenue.
- Subject
- Learning & Education
- Essay
- Theories of teaching, and what schools are for