Fed Study: Federal Financial Aid Drives Up College Tuition Cost

August 20, 2015 0 Comments

I wasn’t exactly sure a study for this would ever surface because it really isn’t necessary. Understandably, the issue over surging college tuition cost has been vexing for most people. After all, economics is a difficult concept to grasp, and people (as a collective) usually cannot understand the mistakes they’ve done until some professors in academia or some think-tank in D.C. commissions an expensive study to point out the blatantly obvious…

Then again, it’s not as if we haven’t had similar studies like this before. A study in 2003 found that Pell grants have consistently correlated with the increase of net tuition costs for top-ranked private institutions (Singell Jr. & Stone, 2003). You also have the study from Harvard and George Washington economists that have reached the same conclusion, using data from the for-profit higher education sector (Celline & Golding, 2012). There is also another published study with evidence that colleges lower their institutional aid awards when state governments increase need-based awards, and vice versa (Curs & Dar, 2010). The working paper UCLA has a concluded nearly the same thing, except with different variables, noting that private colleges increase both institutional aid and revenues as a response to both federal grants and loan programs. Public universities only seem to respond to grants and not loans (Acosta, 2001).

There is still much more work that contributes to the subject matter, but you get the point. More often than not, we find that colleges and university respond to increases in federal aid by either increasing tuition cost (revenue) and/or decreasing institutional aid (scholarships). With the overwhelming amount of evidence, you would think policy makers would understand this correlation by now. Then again, our policymakers don’t even read major pieces of legislation before making it law. So it goes without saying that I’ll be doing the public a solid by actually explaining what is in the study, commissioned by the Federal Reserve Bank of New York…

In The Beginning…

First of all, it is worth noting that the idea behind the correlation between rising college sticker prices and increases in federal aid originated from Reagan’s Secretary of Education, William Bennett. William Bennett (1987) argued that increases in federal aid enable colleges and universities to raise their tuitions, confident that federal loan subsidies would cushion the increase. This observation became what is known as the ‘Bennett Hypothesis.’

The study also touches base with an extensive history of the student loan program, which are governed by the 1965 Higher Education Act. The HEA mandates six direct forms of funding to higher education. The one covered by this topic is known as Title IV (the others involving funds appropriated to continuing education, libraries, underdeveloped educational institutions, strengthening teaching quality & undergraduate education). The study also mentions Pell Grants a significant amount of time, which are considered a substantial amount of financial aid.

As most students already know, Pell Grants are awarded to low-income undergraduates, which are based on financial need and cost of attendance (capped at the maximum, and changes from time to time). The William D. Ford Federal Direct Loan program (formally known as the Federal Family Education Loan Program as of July 2010) offers low-cost financing for undergrads and graduate students under four types of loans: Direct Subsidized, awarded based on financial need for which the government pays the interests; Direct Unsubsidized Loans, also based on financial need, but the student is responsible for paying the interest throughout school and beyond; Direct PLUS loans, awarded to graduate students/parents of undergrad students and requires the borrower not to have adverse credit histories; and Federal Perkins loans, which are made by particular participating institutions with exceptional financial need.

Although there are some mixed conclusions on the accuracy of this hypothesis, it’s hard to deny that public and private post-secondary institutions respond to federal aid in some way, shape or form (More on this later)

The Data

For very few of us, the correlation between the sticker price of college tuitions and federal financial aid is very straightforward. For other, they may not be as easily convinced by reciting basic economic theory. For everything else, the FRBNY uses a very precise data set from three primary source from the Department of Education: Integrated Postsecondary Education Data System (IPEDS), data from the National Postsecondary Student Aid Survey (NPSAS) and Title IV Administrative data from the DOE’s Federal Student Aid Office (FSA); however, in the study, the FRBNY refers this as ‘Title IV’ data.

The IPEDS survey is conducted annually by the DOE’s National Center for Education Statistics (NCES), which analyzes trends in post-secondary education. All Title IV institutions are required to complete an IPEDS survey by the end of the academic year. While the IPEDS collects data on a broad range of statistics, the FRBNY study mainly concentrates on the sticker price of tuition and enrollment. Also, the IPEDS data has been around since 1980, but the study focus on a time frame between 2001 – 2012.

The IPEDS also has the ability to assess the uses of financial aid from the government and non-government sources. The only problem with this is that IPEDS data is restricted to something called the “Student Financial Aid” survey, which have some issues what makes using this data unreliable.

  1. The total of financial aid and the number of recipients are limited to full-time, first-time degree-seeking undergrads, which may be difficult for administrators to be able to collect this data.
  2. Full-Time, first-time degree-seeking undergrads, are not representative of the entire student body. There are also transfers students, grad students and students that have taken time off from their studies to consider.
  3. The Student Financial Aid doesn’t distinguish between federal loans and other types of loans (private). It also doesn’t distinguish between unsubsidized and subsidized loans.

For this reason, the study doesn’t use the Student Financial Aid survey. Instead, FRBNY decided to use Title IV Program Volume Reports for tracking financial aid data. FRBNY also decided to merge FSA data with IPEDS to obtain federal loan borrowing data, Pell Grants, and enrollment/sticker price data for Title IV institutions.

As far as I know, the study doesn’t utilize the NPSAS data much, considering that NCES conducts this research every four years. Instead, FRBNY uses the NPSAS data to measure the impact of policy changes from student borrowers capped at the maximum funds they are eligible to receive.

Evidence & Results

Using regression estimates (which I won’t get into because this is getting out of hand), FRBNY was able to determine the sensitivity of the expansion on federal aid and student tuition. Pell Grants have a coefficient of 0.40 with a 5% confidence level. This means for every dollar made available to students for Pell Grants, the sticker-price of tuitions increase by 40 cents. In the same regard, unsubsidized loans increase the sticker price of tuitions by 47 cents, while subsidized loans increase tuitions by 63 cents and both loans have a confidence level of 1%. This is consistent with the Bennett Hypothesis, which claims that college tuitions increase in response to greater availability of federal aid programs.

Although, there are still some things to consider when determining these variables of different institutions, such as the 2004 cost of attendance, expected family contribution, institutional quality, and admission rate. When controlling for these factors, FRBNY found subsidized loans remained unchanged. There were also no significant changes in Pell Grant sensitivity; however, the correlation becomes less necessary to sticker-price sensitivity (-70% correlation).

FRBNY also mentions the differences in varying degree programs, such as 4-year, 2-year, and vocational/certificate training programs. These factors were considered when FRBNY observed the increases in demand for 2-year education, amid the high unemployment rate levels as a result of the Great Recession. When controlling for these factors, the results were again unchanged.

Federal Aid & The For-Profit Sector

This sector is going to get a lot of scrutinies (for good reason), considering most people tend to believe higher education has become nothing more than a business. While most popular post-secondary institutions are either public or private not-for-profit, you do have some institutions that operate on a pure profit motive, which may or may not be a good thing (at least when the government is willing to back the failures of the private sector).

In the study, the FRBNY notes how for-profit colleges have increased their tuitions as a result of legislative changes to Title IV programs. Although there are only 40 for-profit schools in the NPSAS dataset (another roadblock), the study was able to note the revenue patterns of at least 14 for-profit education companies that are publicly traded (eight of these firms are observed throughout all three legislative changes).

These companies include Apollo Education Group, which operates the University of Phoenix and one of the largest post-secondary education providers with more than 300,000 undergrads and postgrads as of 2013. It also includes Corinthian College Inc., which owned a chain of different colleges and universities throughout North America. One of these colleges includes Everest University, which involved a troubling scandal involving the enrollment of a 37-year-old man with mental disability who couldn’t read beyond a third-grade level. Unfortunately, that is another story for another day…

In 2006, around the time the HEA reauthorization increased the subsidized loan limits for freshman and sophomore students, you can see the abnormal returns for the for-profit education sector. In 2007, Pell Grants amount were increased by 2.22% and following the passage of the 2008 Ensuring Equal Access to Student Loans Act, the amount of unsubsidized loan borrowing increased anywhere from 3.3% – 4.8%.

Financial Aid & Today’s Student Loan Problem

It’s pretty clear, given the evidence, that there is enormous sensitivity between federal financial aid and college tuitions. It’s also pretty clear that this problem isn’t going to disappear anytime soon. More and more students seek these methods for financing their education. High wage employment prospects remain bleak for those without a college degree. Many earn jobs that pay less on average, which leave students without the ability to pay off their student loans.

So what are the alternatives? We can limit or perhaps end the amount of financial aid for students, which would mean many students would be unable to obtain financing for higher education. This would hurt their chances of obtaining employment, as those with a college degree are more likely to earn more money on average than those without. However, we can’t ignore the fact that there is a large number of recent college grads who cannot find jobs that require a college degree. On the other hand, there is a brighter side: without the need of federal aid, students will spend more time in the labor force gaining marketable skills without crippling debt.

The causes of our problems are pretty obvious. The answers on how to correct them are not. I’m sure we can expect a couple of unrealistic, unproductive plans within this election season.

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