Accounting for the Rise in College Tuition

By Betsy Prueter

A recent paper from the National Bureau of Economic Research focuses on the 106% rise in college sticker price (tuition and fees) from 1987 to 2010 (from $6,600 to $12,600). Even after taking into account institutional aid, tuition and fees still grew by 78% (from $5,790 to $10,290).  According to the report, this growth is in large part due to the amount of federal student aid made available to students, the decline in student loan interest rates and expanded grant aid.

Some primary findings and analysis offered by the paper are as follows:

• Even after analyzing shrinking endowments, decreasing state support and the impact of high faculty salaries, researchers found that student aid accounted for the greatest share of the college cost increase.
• These findings support the Bennett Hypothesis, a much debated theory from former Secretary of Education William Bennett, asserting that increases in financial aid “have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase.” To date, results on the validity of the Bennett Hypothesis has been mixed at best.
• The paper suggests that not only does the availability of financial aid lead to higher college costs, it leads to more debt (as students take out more and more loans to address the higher price tags) and more loan default (as the labor market does not always offer returns of the same financial magnitude of a student’s debt load).
• Critics of the findings and the methods point out that the researchers did not separate findings by institution type (data from private and public institutions are combined) which may vastly skew findings.
  • The report does, however, call for further research to disaggregate between public and private institutions.