A new report by the Federal Reserve Bank of New York concludes that colleges benefit more from federal student aid than students do.
Researchers compared how much student aid programs expanded between 2001 and 2012 with how much tuition rose in the same time period. They analyzed three types of programs: Pell Grants, federal subsidized student loans, and unsubsidized student loans.
For every dollar increase to Pell Grants, colleges increased tuition by an average of 55 cents—leaving only 45 cents for students.
For every dollar given to colleges to expand subsidized loans, schools raise tuition by 65 cents.
According to researchers, colleges that raised tuition the most tended to be less-elite private institutions. They say these schools often rely on higher-income students for revenue because they have modest endowment funds.
"From a welfare perspective, these estimates suggest that, while one would expect a student aid expansion to benefit its recipients, the subsidized student loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect," argue the authors.
The researchers acknowledge that the drivers of tuition are complicated. For example, they say it can be problematic to use sticker price as a measure of tuition because so many students receive alternative forms of aid and may end up paying less than sticker price would suggest.
The authors also note that other market forces drove tuition increases in the time period they studied, but also explain several steps they took to isolate the effects of expanding student aid.
Writing for Money magazine, consumer advocate and author Bob Sullivan points out that not all colleges increased tuition equally during the recession—and he says simply eliminating student aid immediately would punish students more than schools.
The takeaway should be that financial aid is an inefficient tool for improving college access, economist Jeffrey Dorfman argues in Forbes. He encourages industry leaders to seek new methods for controlling college cost that help students more directly.
However, no one—not even the study authors—seems to have a good suggestion for what that policy might be, says Sullivan (Sullivan, Money, 7/14; Dorfman, Forbes, 7/13; "Review & Outlook," Wall Street Journal, 7/19).
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