For-profit colleges accepting federal aid charge, on average, 75 percent more tuition than those that don’t accept the aid, a National Bureau of Economic Research study has found.
The results suggest federal college subsidies raise the cost of college significantly, as critics have charged for decades.
“This is the first paper that really found strong evidence of the existence of price difference caused by federal financial aid,” said Robert Archibald, a professor of economics at the College of William and Mary.
The study, titled “Does Federal Student Aid Raise Tuition?” was written by Stephanie Cellini, an assistant professor at George Washington University, and Harvard University Professor of Economics Claudia Goldin.
The importance of its findings, Archibald said, is twofold.
“It’s going have a huge impact in the debate over the Bennett Hypothesis. People whose ideological persuasions are that federal aid may crowd other aid out, they’re really going to like this,” he said.
But he says he doubts it will change much in the for-profit sector because “people paying different prices for the same commodity doesn't last very long.”
Free Money for Colleges
The Bennett Hypothesis says institutions will raise tuition above the cost of education to capture as much federal aid as they can.
"[The difference in tuition] seems to be similar to the average student Pell Grant award," Cellini said.
Cellini said their research finds little evidence the higher price of subsidized institutions comes from anything other than subsidies.
Impact on Competition
Cellini, Goldin, and Archibald all say there’s no evidence this inflation hurts competition in the for-profit market. In addition, Goldin said, there’s little evidence schools that accept federal aid offer a better education.
Many non-Title IV schools—those that do not accept federal aid—are thriving, the report says. Such schools account for half the for-profit sector, which other studies have missed because “they are not captured in official U.S. Department of Education counts, offer mainly non-degree programs, and are far smaller than their Title IV counterparts.”
“Somehow they're able to survive,” Archibald said. “And that's the puzzle. How could you survive if the competition has this huge advantage over you? That suggests that either it's not going to last or there's something about the cost structure that's different.”
Archibald and Golding favor the latter, saying the for-profit market has not reached equilibrium.
Goldin said accepting federal aid isn’t worth the hassle for many institutions, especially those not aimed at low-income students, such as Internet technology schools.
Because the researchers didn’t examine how schools that receive federal aid spend it, they can’t draw conclusions for traditional colleges and universities, Cellini emphasized.
“We don’t really know the reasons for these differences, but we know they exist,” she said.
Federal grants “grease the wheels and gears of education,” Cellini added, allowing low-income students a chance at higher education.
“Does Federal Student Aid Raise Tuition?” National Bureau of Economic Research, February 2012: http://nber.org/papers/w17827 
Image by Joe Wolf .