Will More Pell Raise Tuition? Study Says Not at Nonprofits

July 18, 2016

By Paula Acevedo, Graduate Policy Assistant 

Back in 1987, former Education Secretary William J. Bennett argued that the more financial aid is available, the more tuition would increase, putting higher education further out of reach for low-income students. While tuition will increase regardless of whether the federal government gives students money, Bennett proclaimed it would rise much faster when coupled with financial aid because schools believe the aid will cushion the extra cost. The argument has been coined the “Bennett Hypothesis,” and is based on the economic theory that the more you subsidize something, the more demand increases, driving up price. 

But research suggests the Bennett Hypothesis isn’t fully supported. A recent study by the CATO Institute’s Robert B. Archibald and David H. Feldman found that tuition and loans are bi-directionally linked -- in other words, tuition increases require more aid availability, and vice versa, more aid availability helps students mitigate tuition increases.

The report also found that Bennett’s “greedy colleges” argument -- that institutions tax any increase in financial aid by raising tuition -- is contrary to how nonprofit universities determine admissions and pricing. Nonprofit schools do offer tuition discounts based on merit and need. They also resort to “need aware” admissions to meet their revenue and enrollment goals, by selecting students who are ranked lower academically but can afford to cover the costs over higher-ranked students with very low willingness to pay.

But the “greedy colleges” argument does apply to for-profit colleges, which seek to maximize short-term revenues and long-term profits by providing a bare-minimum quality education, without making improvements or offering institutional aid. 

This report, from conservative CATO Institute, directly contradicts a popular talking point for not increasing the Pell Grant: that doing so will only drive up tuition further. As NCAN embarks on an advocacy campaign to increase FAFSA completion, which if successful will increase the number of students receiving federal financial aid, it is important to understand how that aid affects the higher education market overall.

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