Does Federal College Aid Really Help or Is It Just Capitalized into Higher Tuitions?

June 11th, 2012 at 1:30 pm

There’s a conservative talking point that opposes federal aid for college because, they claim, the aid just gets absorbed into higher tuitions.  Careful research does find such linkages when it comes to for-profit schools, but much less so when it comes to publics and non-profits, which is where about 90% of undergrads get their higher ed (see figure).*

Source: NCES

It is reasonable to ask whether outside aid get just gets capitalized into tuition.  To the extent that it does, it’s a transfer from taxpayers to the various beneficiaries of higher tuitions, including administrators and (some) professors.  But it’s by no means a slamdunk that such a transfer occurs.  It depends on both elasticities and institution constraints. 

The more inelastic the demand is for a product, the more the subsidy can end up going to the wrong person.  If parents and kids are willing and able to pay almost any price, then sure, colleges can take a $1,000 Pell grant and just add that amount to the tuition. 

column in today’s WSJ reports evidence of this sort of transfer, but the results apply exclusively to private, for-profit schools:

The study’s authors warned their findings don’t apply to public colleges and private nonprofit schools, which they say are different because they aren’t motivated by profits and because their prices are largely determined by state funding and donations.

Research shows that tuitions at the public universities, where 75% of students enroll, are very much a function of revenue flows.  Thus, when they hit recession—and remember, states must balance their budgets—a couple of unfortunate things tend to happen at the same time.  First, tuitions tend to rise, and second, with the increase in unemployment, more young adults decide that given the weak job market, this would be a good time to get some more education.  (Another interesting strain of research finds that increased state Medicaid costs has also led to higher tuition at public universities.)

So that’s when you’d actually want to ratchet up Federal aid, which is in fact what the Obama administration did with the American Opportunity Tax Credit and significant increase in Pell grants

Conservatives who oppose these measures often complain that they don’t really lower tuitions because they’re directly capitalized into the price, but in the majority of cases, that’s wrong (Rep Paul Ryan goes after Pells particularly aggressively).   We might well want to exclude those institutions that abuse federal aid from the programs that grant them, but they are a minority.  If we want less advantaged kids to have a fair shake at getting to and getting through college, these aid programs are essential.

*The research on which the WSJ column is based notes that not all private, for profits are eligible for federal government aid.  By definition, the tuition-hike story does not refer to them, of course.

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17 comments in reply to "Does Federal College Aid Really Help or Is It Just Capitalized into Higher Tuitions?"

  1. JW Mason says:

    Careful research does find such linkages when it comes to for-profit schools, but much less so when it comes to publics and non-profits

    and

    Research shows that tuitions at the public universities, where 75% of students enroll, are very much a function of revenue flows.

    But no link, no cite, no names. Can you give just a hint of what you’re referring to here?


    • Jared Bernstein says:

      See link at end of post re “careful research.” That’s the study on which the WSJ article is based–both of these are in the post!!

      Re tuition at publics and revenues, see http://nces.ed.gov/pubs2002/2002157.pdf
      From that study:
      “For public 4-year institutions, revenue from state appropriations remains the largest source of revenue and is the single most important factor associated with changes in tuition.”


  2. Rima Regas says:

    You know what, Jared? It really doesn’t matter. Education needs to be re-prioritized, reinvented, and made free. Starting life with tens of thousands of dollars in debt for what is, at best, a mediocre education, is a very raw deal. At this point, even the “good” schools have to offer remedial courses in subjects that should have been mastered in the first part of high school. The entire education system is broken. I see no reason why we can’t dream big here and come up with something that is similar to what France, Germany, and Finland do. We need to reform thinking too, and stop hanging on to the mistaken belief that shunting some kids off to vocational schools in middle school is undemocratic. Not everyone can or should go to college, but everyone needs to go to school. This will take a huge commitment. I don’t know how this gets done as long as the GOP is overrun by the Tea Party ignoramus class…


  3. John Holcomb says:

    The argument that federal aid, along with loose student loan credit generally, contrbutes to spiraling tuition has a superficial plausibility. But consider: tuition levels at private secondary schools has increased in similar fashion over the years, and federal aid and subsidized loans are nonexistant in the secondary education market.


    • Rima Regas says:

      In the Los Angeles area, the cost for private secondary school averages between $30-40K per year. Even for a school that is highly specialized, it’s insane!


    • John Holcomb says:

      Pardon me, “tuition levels …have increased.”


  4. Larry says:

    I’m curious about the tuition growth rates among the three categories of school. It would seem that if they were similar, that would indicate a good likelihood that the same factors influence them all. Of course, aid availability might be not be a factor in any of them.


  5. Jacob AG says:

    I see what you’re trying to do here, Jared, by showing that for most schools, federal tuition aid isn’t (completely) absorbed into higher tuition costs 1 to 1. And let’s say that that’s true.

    But is that all the cost shifting that matters? Is our goal really to say that not *all* of our federal aid is going to administrators and (some) professors (etc.)?

    For example, say we subsidize the tuition of a low-income student to the tune of one dollar, 80 cents of which will be absorbed into the now-higher tuition at the private, for-profit school he’s chosen to attend, because that’s the best school he got into, and federal aid is going to cover it anyway. I think this is actually a reasonable thing to assume, given that both demand for and supply of higher education is actually rather inelastic! (if it’s not, just adjust that 80 cents number downwards to whatever you like, and consider my argument based on that number).

    OK, so now his tuition is effectively 20 cents cheaper. Great… it cost $1 to make his tuition 20 cents more affordable. We have now subsidized the education of a low-income student, in an extraordinarily inefficient way. This seems like a raw deal for taxpayers (does this kid’s parents pay taxes..?). Plus, we have now subsidized a private, for-profit, and I should add *tax exempt* corporation, using that 80 cents. Gross!

    And what about all those other students who are *not* low income, or who *don’t* get that $1 in federal aid? You know, like, middle-income students. Or, *most* students.

    Well, their tuition is still 80 cents more expensive, isn’t it. They didn’t get any aid, but the school is still 80 cents (or whatever number you like, the elasticities aren’t 1 you know) more expensive. They (or their parents) will now have to either dissave more, or borrow more.

    I think you have to make some tough value judgements here: how do we want to spend taxpayers money, who do we want to subsidize, and are we comfortable with any negative effects that has on people we’re *not* subsidizing? I’m not saying the federal government shouldn’t provide tuition assistance, I’m just saying it’s more complicated than you’ve laid it out here. And perhaps more importantly, what other policies besides Spending Money could we explore to improve education? I mean really, an 8-year-old could come up with tuition assistance as a worthwhile policy — economists can do better than that.

    Full disclosure: I am (or was) a middle-class grad student at a private, for-profit school, $65k+ in debt.


    • Jacob AG says:

      PS — the “was” in that sentence is in reference to my middle-class status. I made something like minimum wage last year, not sure what that means class-wise, but income-wise I’m deep below the median…


    • Fargus says:

      I think your point needs to be readjusted a bit. Here’s how I’m looking at it. Say there’s 5 students, and four of them get an average of $20 in financial aid on a tuition of $100. If the whole amount of financial aid is recapitalized into tuition, then the average tuition is going to rise to $116, and that $20 is really only going to be worth $4 (only 20% of what it was at the outset, to match your example). Meanwhile, tuition for that one other student is going to creep 16% higher in this case.

      What I mean to say, I guess, is that there’s more in it than, “If we decrease one student’s tuition, then the other students’ tuitions are all going to go up by the amount of that aid absorbed into the tuition.” That is, if you’ve got one student getting aid and an arbitrary number of students not getting aid, then the amount of the aid recapitalized into the tuition is going to be spread out among all of the other students. If most of the students receive aid, then the ones who don’t are going to bear a disproportionate burden (and perhaps get nudged up into an area where they do need aid, intensifying the feedback loop if indeed the feedback loop is there).


      • Jacob AG says:

        “What I mean to say, I guess, is that there’s more in it than, “If we decrease one student’s tuition, then the other students’ tuitions are all going to go up by the amount of that aid absorbed into the tuition.””

        Right. My example (incorrectly) assumed that just as many students receive aid as don’t. There is a distribution, of course, but for illustrative purposes I ignored it. You could use the “correct” one, but the underlying point would be the same: there are winners, there are losers, and evaluating current levels of tuition assistance relative to what would be ideal requires carefully measuring what winners are winning, what losers are losing, what changing the level of tuition assistance would do to those numbers moving forward, and then you’d have to make some value judgements (e.g., “would a 4% tuition hike for 100 non-recipients be worth an 8% reduction for 50 recipients?” and the like)

        It’s just not enough to ask “Does Federal College Aid Really Help or Is It Just Capitalized into Higher Tuitions?” (the title of Jared’s post). It’s obviously not all capitalized into higher tuitions, but that doesn’t mean it “really helps.” The policy effects and value judgements are more nuanced.


  6. Yeah_No says:

    “There’s a conservative talking point that opposes federal aid for college because, they claim, the aid just gets absorbed into higher tuitions.”

    I think this short-changes the Center for College Affordability and Productivity’s “Bennett Hypothesis 2.0.” Andrew Gillen doesn’t baldly claim that all federal aid gets absorbed, just that certain types of federal aid gets absorbed in certain circumstances, and he carefully defines those circumstances. For instance, Pell Grants work better for poor college students than Grad PLUS loans do for law students. Distinguishing the effects of different types of federal aid is not something researchers have been doing.


  7. John says:

    Your graph seems to add up to more than 100%. Like 110%-120% or so.


  8. Tom in MN says:

    Thanks for the “(some)” about prof’s salaries. I’m not in there at my big-U, and the ones that are in there are the the ones that bring in the research dollars and teach less. They can get (and are stupidly encouraged to) outside offers that are then matched and drive up their salaries.

    Another lesson that you can’t fight economics. Not until we get decent financial incentives to teach (at any level) will our schools and universities improve.


  9. Misaki says:

    http://jaredbernsteinblog.com/rocket-scientists-part-2/
    http://jaredbernsteinblog.com/were-not-all-rocket-scientists/

    Job creation without higher government spending (including education spending), inflation, or trade barriers: http://jobcreationplan.blogspot.com/


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