Christian
Science Monitor...
How
can it
be? Student financial aid fuels increase in college tuition
By Richard
Vedder and Andrew Gillen
January 5, 2012
When
federal (and state) financial aid programs make money available to
well-off
students, it is in a college’s interest to capture that aid and use it
to
‘improve’ the college, thus driving up costs and tuition. Aid must be
restructured so that more of it goes to needy students.
WASHINGTON -
Something is fundamentally wrong with America’s college financial aid
system
when students from families with triple-digit incomes receive plenty of
federal
aid – while the less well-off are scrambling for it.
According
to the Department of Education, 35 percent of dependent students from
families
making at least $100,000 a year received Federal Stafford Loans in
2008, and
15.6 percent received the “subsidized” variety (where the government
pays the
interest while the student is in school). Stafford loans account for 82
percent
of all federal financial aid lending.
Two
theories compete to explain this, and they offer radically different
policy
prescriptions.
The first
explanation holds that college costs are mostly determined by factors
over
which colleges have little control, such as prevailing faculty
salaries.
Colleges can do little other than react by setting tuition to cover
costs.
If students
are having to pay more, then financial aid and state appropriations
budgets
must be inadequate. The solution is straightforward: The federal
government
should increase the money available for financial aid.
We think
this theory is incorrect. An alternative, which holds that the real
problem is
out-of-control spending in higher education, provides the better
explanation.
Under this
view, more money for financial aid will simply be absorbed as college
spending
increases. Our research (most notably our 2009 study, “Financial Aid in
Theory
and Practice”) found that increased financial aid can be downright
counterproductive
by fueling the academic arms race – a major driver of the cost and
tuition
explosion in higher education.
The
underlying problem is that the “value-added outcomes” of colleges (how
much
their students learn, how much their skills increase, etc.) are not
easily
observed or measured. That largely precludes colleges from competing
based on
the education they provide.
Instead,
they compete on prestige or reputation. Their goal is to signal high
quality,
and the easiest way to signal that is to have high-quality “inputs,”
such as
prize-winning faculty and state-of-the-art equipment.
But these
are costly, and without a measure of the true benefits they bring to a
school,
cost-benefit analysis cannot reliably guide decisions. Thus, anything
that has
a plausible claim of improving the institution will be funded if money
is
available, with the final allocation of spending largely determined by
stakeholder struggles among constituencies of the university.
Regardless
of how money is allocated, the end result is that schools have an
insatiable
need for more money – a phenomenon described as (Howard R.) Bowen’s
Rule, and
thoroughly documented by Charles T. Clotfelter in “Buying the Best:
Cost
Escalation in Elite Higher Education.”
Colleges
know that students operate under the assumption that a college
education serves
as a passport to the middle class, and that students are willing to pay
a
significant amount to get one. So colleges act accordingly by charging
them
more.
Thus when
financial aid programs make money available to well-off students, it is
in the
colleges’ interests to raise their tuition to capture that aid and use
it to
improve the college, or more accurately, its perceived quality.
Unfortunately,
the increases in costs and tuition soon drive even those who are well
off to
beg for access to financial aid. And sure enough, by 2004 the median
parental
income of dependent unsubsidized Federal Stafford Loan borrowers was
more than
$75,000.
The end
result is that the college has more money, which is often spent on
dubious
schemes to increase its perceived quality, such as paying faculty
members to
write the 21,674th academic piece on Shakespeare. Meanwhile the
government and
the students struggle to come up with ever increasing amounts to pay
for
college.
All of this
is not to say that students and their families, even relatively
affluent ones,
are not struggling with paying for college. But providing financial aid
will
not help those in the upper-income range – it will just allow colleges
to raise
their price while saddling students with more debt.
To be
clear, bad financial aid design is not the underlying cause of the
explosion in
college costs – the root cause being competition based on reputation
leading to
the academic arms race. But federal aid does exacerbate the problem by
pouring
fuel on the fire.
This can
largely be avoided with more careful design of federal (and state)
financial
aid programs. The more programs look like Pell grants (means tested,
modest in
size, empowering students rather than colleges), the better.
So far,
little indicates that this is a priority or even recognized within
influential
higher education or public policy circles, which are virtually
unanimous in
calling for more federal financial aid spending. More money funneled
through
existing federal aid programs is not the solution, but smarter aid
spending
might be.
Read this
and other articles at the Christian Science Monitor
|