As Federal Aid Goes Up, College Costs Rise Enough to Gobble It All Up

Josh Mitchell of the Wall Street Journal writes today about the spiraling cost of college:

The federal government has boosted aid to families in recent decades to make college more affordable. A new study from the New York Federal Reserve faults these policies for enabling college institutions to aggressively raise tuitions.

….Conservatives have long held that generous federal-aid policies inflate higher-education costs, a viewpoint famously articulated by then-Education Secretary William Bennett in a 1987 column that came to be dubbed the Bennett Hypothesis.

Regular readers know that I have at least a bit of sympathy for this view.  But Mitchell doesn’t really explain how the data supports this hypothesis. So I’ll give it a try. As you can see on the right, federal aid increased very modestly from 2000 to 2009. Then it went up sharply starting around 2010. If this aid were truly helping make college more affordable, out-of-pocket expenses for students (i.e., actual cash outlays net of loans and grants) would start to flatten out or even go down.

But that hasn’t happened. You can lay a straightedge on the red line in the bottom chart. Basically, families received no net benefit from increased federal aid. Actual cash outlays rose at exactly the same rate as they had been rising before.

My guess is that this will continue until universities get to the point at which students and families simply don’t value higher education enough to pay any more. That’s the gating item, not aid programs. When out-of-pocket expenses finally equal the value that students put on a college degree, prices will stabilize.1 That’s my guess, anyway.

The Journal article has more on this, and the Fed study is here if you want to read more about the methodology—much more sophisticated than mine—that the authors used to come to a similar conclusion.

1Actually, it’s when the perceived value of a college degree equals current cash outlays plus whatever burden students associate with future loan paybacks. However, the latter is pretty tricky to quantify since it varies widely depending on the university, the student’s major, and their subjective discount rate.