Tag Archives: federal student aid

Why They Seem to Rise Together:
Federal Aid and College Tuition

It’s called “the Bennett Hypothesis,” and it explains–or tries to explain–why the cost of college lies so tantalizingly out of reach for so many. In 1987, then Secretary of Education William J. Bennett launched a quarter century of debate by saying, in effect, “Federal aid doesn’t help; colleges and universities just cream off the extra money by raising tuition.” Now Andrew Gillen, research director of CCAP–the Center for College Affordability and Productivity–has tweaked the data and produced a sophisticated “2.0” version of the hypothesis. It’s filled with heavy math, game theory and terms like “inelastic fairly vertical curves.” You probably won’t read it. We know. But it’s important. So here are some smart people who have read it, and have something to say: Peter Wood, Hans Bader, Richard Vedder, George Leef and Herbert London. image for mtc.jpeg

Peter Wood: They Are Insatiable

Long before I knew it was called the “Bennett Hypothesis” I knew that colleges and universities increase tuition to capture increases in federal and state financial aid. I attended numerous meetings of university administrators where the topic of setting next year’s tuition was discussed.
The regnant phrase was “Don’t leave money sitting on the table.” The metaphoric table in question was the one on which the government had laid out a sumptuous banquet of increases of financial aid. Our job was to figure out how to consume as much of it as possible in tuition increases. This didn’t necessarily mean we were insensitive to the needs of financially less well-off students. A substantial portion of the money we captured would be reallocated as “tuition discounts” or “institutional aid.” That is to say, just as Andrew Gillen observes, we combined Bennett Hypothesis-style capture of external student financial aid with “price discrimination.” And we did all this in the pursuit of educational excellence. It was a large private university in the shadow of world-ranked neighbors and it was attempting to pull itself up in the world of prestige and influence by its bootstraps. There were townhouses that needed buying; laboratories that needed building; faculty stars that needed hiring; classrooms and residence halls that needed refurbishing; symphonies that needed performing; grotesque modern sculptures that needed displaying; and administrators that needed chauffeuring. So long before I heard of “Bowen’s Rule,” I was also familiar with the idea that “in the quest for excellence, prestige, and influence, there is virtually no limit to the amount of money” a university could spend. Familiar as these ideas are, I have never seen them as well elucidated as Andrew Gillen has in Introducing Bennett Hypothesis 2.0. If there is a fault in this remarkable policy paper it lies in the modesty of the title. Gillen has provided what by all rights should be a foundational document for any further analysis of the vexed issue of how federal (and state) financial aid interacts with the pricing strategies of colleges and universities. Gillen’s sophisticated revision of Bill Bennett’s idea explains many of the perplexities of the data. Yes, Pell Grants do not drive tuition increases the way general tuition assistance does. Yes, many colleges prefer to increase their selectivity rather than expand capacity. (He doesn’t mention, however, the strategy of doing both at once by creating highly selective “honors programs” and remedial tracts at the same institution.) Price discrimination in the form of variable tuition discounts ensures that no ordinary observer can figure out what is happening when federal aid mixes with pricing strategies. One of Gillen’s most compelling observations, however, is what he calls “the dynamic story,” which he introduces by way of game theory. This is his explanation of why a college cannot plausibly sit on the sidelines as its competitors raise tuition and use the increased income to raise their standing. Gillen’s theory, though highly plausible, remains to be tested. Let’s hope that comes soon.

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Richard Vedder: Market Discipline, Please

Andrew Gillen masterfully demonstrates that Bill Bennett is right–federal financial aid programs lead to higher tuition. The implications of this and related financial aid effects are profound:

1. The intended income transfers from taxpayers (and, increasingly bondholders) to students have been largely diverted to college coffers; swelling payrolls and leading to armies of new university bureaucrats, million-dollar college presidents, an academic arms race and other pathologies;

2. This, in turn, has thwarted university productivity growth and helps explain why higher education is vastly more expensive than in most other major developed countries;

3. The goal of helping low-income students has not been met, and a lower percent of recent college graduates come from less affluent students than was true in 1970 when Pell Grants did not exist;

4. To the extent that these aid programs have increased enrollments (read Gillen), they have added to the growing disconnect between labor-market realities and student job expectations, creating armies of college graduates who are bartenders, taxi drivers, etc.

5. Enrollment increases, in turn, have contributed to a dumbing down of higher education and to declining standards.

What to do? The federal government needs to wind down its financial aid commitment. Restrict eligibility for aid to truly low-income students. Impose performance criteria for aid recipients: mediocre students will lose aid. Make the college absorb some of the risk for loan defaults–a lesson we should have learned from the financial crisis. Give Pell Grants as vouchers directly to students, not schools. Reinstate private lending options. Unveil new human capital contract approaches that reduce debt reliance. Downsize and reinvent federal programs and allow market discipline to operate more.

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George Leef: Will Politicians Pay Attention?

William Bennett is no economist (in fact, he once told an interviewer that he never reads books on economics) but his instinct on the connection between federal aid and rising college costs was pretty accurate. While higher education establishment defenders have often tried to dismiss Bennett’s insight, it’s basically correct, Gillen shows.Not always, however. Gillen argues persuasively that student aid targeted at low-income students who otherwise wouldn’t have gone to college contributes little or nothing to rising costs because the institutions cannot “capture” the additional funds. That finding doesn’t mean that it would be a good policy to increase this kind of aid, of course.Government student-aid programs that are universally available, however, do lead to rising college costs. Gillen has worked through various differing scenarios to show how increasing student aid is apt to influence college officials. Particularly important in that regard is his emphasis on looking not just at short-run effects, but also what he calls “the dynamic story.” Here’s what he means. Even if some schools decide not to raise tuition when government aid puts more dollars in student pockets, those that do will spend the revenues gained on the zero-sum game of gaining prestige. Since most colleges won’t want to keep falling behind in that arms race, they’ll eventually give in and raise tuition. Not always, however. Gillen argues persuasively that student aid targeted at low-income students who otherwise wouldn’t have gone to college contributes little or nothing to rising costs because the institutions cannot “capture” the additional funds. That finding doesn’t mean that it would be a good policy to increase this kind of aid, of course.Gillen concludes that the only escape from Bennett 2.0 is for the nature of competition in higher education to change–away from seeking greater “prestige” and toward competing for consumer dollars by offering better value. He’s right and the rumblings of disaffection with mere credentials and the search for real education seems to presage just that.I applaud this work, but will it make any difference? After all, it is clear beyond any doubt that raising the minimum wage is counter-productive, but politicians keep doing that. Why should Gillen’s demonstration that the more politicians try to make college “affordable,” the more costly it becomes be any different?

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Hans Bader: Ever-growing Bureaucracies

You don’t need to be a Ph.D in economics, like Gillen is, to know that government subsidies usually lead to higher costs. That subsidies drive up costs is something I learned in introductory economics, long before I got my degree in economics or worked for the Education Department. The value of Gillen’s study is to show that this conclusion logically remains true even under widely-varying assumptions about educational markets. Gillen does not discuss certain Education Department rules that drive up tuition even more directly. For example, certain low-cost schools are affected by the Education Department’s 90-10 rule, which requires that the school keep tuition high enough for students that no more than 90 percent of its funding is covered by federal financial aid. So as financial aid rises, tuition necessarily rises even faster. But financial aid is not the only way that the government drives up tuition. State and federal regulations imposed on colleges have mushroomed in recent years, requiring colleges to hire ever-increasing numbers of administrators to comply with them. (There are now more college administrators than faculty at the California State University system and many other colleges). For example, colleges in New Jersey are subject to a costly and complicated anti-bullying law that has 18 pages of required components. Colleges in some states are subject to state sexual harassment laws that are more stringent than federal law, and hold colleges liable for uncapped damages for harassment by students, effectively requiring them to create specialized university bureaucracies to swiftly investigate and discipline students, rather than relying on ordinary campus disciplinary bodies that operate at a slower and more deliberative pace. Government regulations often require that a school be accredited, a condition that accreditors like the American Bar Association use to force law schools to use racial preferences in admissions or run costly diversity and sensitivity-training programs (despite the dubious legality of some such programs and admissions preferences). Such mandates have contributed to the growth of a vast and costly “diversity machine” in college administrations. Recent Education Department guidance documents have also made Title IX compliance more difficult and costly for colleges, by seeking to force them to process sexual harassment complaints against students in ways that differ from customary college procedures in disciplinary cases, and to give certain complainants the ability to appeal a school’s finding that an accused student was innocent. Gillen cites a study showing that for-profit colleges whose students received federal financial aid charged 75 percent more than those whose students were not eligible. I wonder if some fraction of this difference was the result of government mandates tied to the financial aid, rather than the aid itself. image for mtc.jpeg

Herbert I. London: We Need Controls

My experience in higher education confirms the opinion that federal aid has an influence, a profound influence, on tuition decisions and other aspects of university finances.

Clearly not all federal aid is the same and not all college responses to aid are the same. However, there is a dynamic quality to federal subsidies that cannot be ignored. Every federal dollar given to a university will be spent. This is a version of higher education’s Parkinson’s Law. The institution expands in multiple ways to accommodate government largesse. Derek Bok, former Harvard president, said, “Universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires.”

Every dollar given to a college goes through the turnstile of institutional improvement. Teaching loads could be reduced, new laboratories might be built, an academic “star” might be lured into a newly created position. But year one in this allocational arrangement is not always related to year two. If the initial costs are borne by government aid, the future costs may put pressure on the administration to seek additional revenue, very often in the form of tuition increases.

In fact, the process tends to be self-fulfilling. Aid producers reforms; reform leads to additional expense; additional expense very often translates into upward pressure on tuition rates. While President Obama has discussed controlling college costs, he overlooks the influence federal assistance has on college affordability. Nor is there any reason to assume a change of direction. There is political capital to be garnered by demanding cost controls and, at the same time, expanding access to tuition assistance. That these conditions may be contradictory is lost on a public increasingly frustrated with the inflated cost of a college education.

Gainful Employment: A Detriment to Competition


Today the Obama Administration unveiled its long-anticipated and highly controversial final gainful employment (GE) regulation  that ties program eligibility for federal student aid to new metrics that are based on student loan repayment rates. Under the new GE rule, a vocational program can qualify as leading to gainful employment and remain eligible for federal aid if one of three metrics is met:

1.     At least 35% of former students are repaying their loans;

2.     The estimated annual loan payment of a typical graduate does not exceed 30% of discretionary income;

3.     The estimated annual loan payment of a typical graduate does not exceed 12% of total earnings.

The rule requires that a program fail to meet one of the three metric three times in a four year period before becoming ineligible for federal student aid, with 2015 being the first year that a program can lose eligibility. Education Secretary Arne Duncan defended the metrics as a “perfectly reasonable bar…that every for-profit program should be able to reach. We’re also giving poor performing for-profit programs every chance to improve. But if you get three strikes in four years, you’re out.”

Continue reading Gainful Employment: A Detriment to Competition

The Trouble With Community Colleges

Community colleges stand to be major beneficiaries of the massive Student Aid and Fiscal Responsibility Act passed by the House on Sept. 17, with about $9 billion in federal dollars to be directed their way if the bill becomes law. Community colleges, as locally based, take-all-comers institutions that typically offer two-year degrees for minimal tuition, are also objects of solicitude by the Obama administration. In a July speech in Warren, Mich., a recession-battered suburb of Detroit, President Obama expressed hope that a federal cash infusion would help an additional 5 million Americans earn degrees and certificates from community colleges over the next 10 years. By retraining at community colleges, displaced autoworkers and others who have lost their jobs during this time of 10 percent unemployment would learn “the skills they need to fill the jobs of the future,” Obama said. Earlier Congress had earmarked $3 billion in federal stimulus money for community-college retraining programs.

That’s the hope. The reality, as Elyse Ashburn of the Chronicle of Higher Education has reported in following a cohort of real-life displaced autoworkers who took generous buyouts from the Ford Motor Co. when it closed a plant in northeastern Ohio in 2006, is that using community colleges for job retraining is easier said than done. Of the 18 young people Ashburn tracked who used their buyout funds plus other Ford help to attend community colleges, only five had graduated or transferred to another college when Ashburn re-interviewed them in 2009. Five had dropped out, and eight were still working on degrees three years later. “Even for the successful students…getting a two-year degree has taken much longer than two years,” Ashburn writes in the Sept. 21 issue of the Chronicle.

The biggest problem was that most of the former Ford workers who had gone right out of high school to the assembly line were completely unprepared for college-level work. Many had to enroll in remedial courses, and others had no idea how to study or manage their time. One young woman found that her two-year nursing program was actually going to be more than four years of full-time study (she won’t graduate until December 2010) because she had to take so many general-education classes before she could even begin her nurse’s training. “There were times when I cried,” she told Ashburn. A young father of five wasted a year after the Ford line in community college class, then decided he’d be better off attending a trade school that offered a preservation-carpentry program.

Continue reading The Trouble With Community Colleges

Ranking Colleges By ”Economic Diversity”

In an effort to show which colleges are reaching out to low-income students, U.S. News & World Report has published “economic diversity” rankings of American colleges and universities. That sounds ambitious, but the rankings are based solely on the percentage of students at each institution who receive federal Pell grants, which mostly go to applicants from families with incomes under $20,000 a year. The magazine concedes that the percentage of Pells “isn’t perfect” as a measure of commitment to enrolling low-income students, but says many experts consider it the best available gauge.
Highest in the rankings is an institution most American have likely never heard of—the University of La Verne, La Verne, California, with 89 percent of students on Pell grants. Many colleges at the top of these rankings, unsurprisingly, are non-selective institutions, many of which explicitly cater to low-income students. Among the highest-ranking high-prestige colleges and universities are UCLA (35 percent) and the University of California, Berkeley (32 percent). The most selective institutions tend to cluster low in the rankings, at 10 percent (Yale, Princeton, Duke, Tufts, Northwestern) or below (Notre Dame, William and Mary, Virginia, Washington University in St Louis).
The rankings respond to complaints that U.S. News focuses too tightly on rich private universities, as well as to complaints that race and gender preferences ought to be converted into class-based ones that help the children of the poor regardless of race or gender. Pell-based rankings are simple, easy to compile and demonstrate U.S. News’ social concern. But are they helpful? Not yet. It isn’t useful to know a college’s percentage of Pell students (the figure at the University of Texas—El Paso is 53 percent) unless you also know the likelihood that those students will succeed (small in the case of UTEP, which has a graduation rate of 7 percent after six years).