Oh Yes, There’s Evidence Aid Fuels Inflation

Balloon-Blog

From time to time, when I argue there is good reason to believe that government student aid fuels tuition inflation, I get a dismissive response that there is no evidence to support this claim. It happened again last week, at an Education Week event analyzing the potential ramifications of the midterm elections, when a House Education and Workforce Committee staffer interrupted that “there’s zero evidence” aid translates into higher college prices (25:40 mark on the third panel).

Of course, there is evidence that aid fuels inflation.

First, there’s the answer to the question, would most students pay current college prices without aid? I doubt many people of any political stripe would say “sure thing”; they know aid is baked into the price. We also know that subsidies to consumers tend to drive up demand and prices, and since the major aim in higher education is prestige, not profit to investors, there is a strong incentive not to increase seats but to keep out many students and build empires. It is also very hard to start new institutions to absorb demand. Finally, if someone is willing to give you money to help pay for, say, a car, you’ll be incentivized to demand lots of extras on the vehicle. Ditto higher ed, which likely raises prices to pay for those extras that students, very much, demand.

The evidence, however, isn’t restricted to theory and anecdote. Significant empirical research bears it out, though of course effects differ by type of school (public, private, for-profit); type of aid (loans, grants, tax credits); and immediate outcomes (higher overall prices, lower institutional aid, higher prices for out-of-state students). Several studies finding inflationary or gaming effects of student aid are listed below. In other words, there absolutely is evidence that student aid fuels college price inflation, and pretending there isn’t won’t make it go away.

John D. Singell, Jr., and Joe A. Stone, “For Whom the Pell Tolls: The Response of University Tuition to Federal Grants-in-Aid,” Economics of Education Review 26, no. 3 (2006): 285-95.

Bridget Terry Long, “How Do Financial Aid Policies Affect Colleges? The Institutional Impact of Georgia Hope Scholarships,” Journal of Human Resources 30, no. 4 (2004): 1045-66.

Bradley A. Curs and Luciana Dar, “Do Institutions Respond Asymetrically to Changes in State Need- and Merit-Based Aid? ” Working Paper, November 1, 2010.

Rebecca J. Acosta, “How Do Colleges Respond to Changes in Federal Student Aid,” Working Paper, October 2001.

Michael Rizzo and Ronald G. Ehrenberg, “Resident and Nonresident Tuition and Enrollment at Flagship State Universities,” in College Choices: The Economics of Where to Go, When to Go, and How to Pay for It, edited by Caroline M. Hoxby, (Chicago, IL: University of Chicago Press, 2004).

Nicholas Turner, “Who Benefits from Student Aid? The Economic Incidence of Tax-Based Federal Student Aid,Economics of Education Review 31, no. 4 (2012): 463-81.

Stephanie Riegg Cellini and Claudia Goldin, “Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges,” NBER Working Paper No. 17827, February 2012.

Lesley J. Turner, “The Incidence of Student Financial Aid: Evidence from the Pell Grant Program,” Columbia University, April 2012.

Dennis Epple, Richard Romano, Sinan Sarpça, and Holger Stieg, “The U.S. Market for Higher Education: A General Equilibrium Analysis of State and Private Colleges and Public Funding Policies,” NBER Working Paper No. 19298, August 2013.

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