Does Federal Aid Drive College Tuition?
Does Federal Aid Drive College Tuition? The “greedy colleges” thesis conflicts with how nonprofit universities decide on admissions and pricing.
The enrollment management model does not prove kind to the idea that federal aid causes tuition inflation at nonprofit institutions. On the other hand, there is good evidence for a Bennett effect at for-profit schools, whose behavior is better represented by the textbook model. Although our theoretical framework finds no incentive for most colleges to adjust their tuition in response to changes in federal aid, institutions can “tax” away a part of the federal aid by reducing their own institutional aid. Schools can redirect those resources to other institutional uses. However, unless this tax rate implausibly exceeds 100%, students will still see lower net price tuition. The best evidence on the tax rate is that it is low overall, but higher at highly selective private institutions that are very generous with their own aid.