ERIC ED520390: Making College More Expensive: The Unintended Consequences of Federal Tuition Aid. Policy Analysis. No. 531

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by  ERIC

No. 531 January 25, 2005 Routing
Making College More Expensive
The Unintended Consequences of Federal Tuition Aid
by Gary Wolfram
Executive Summary
As Congress debates the reauthorization of the Also, when large numbers of students begin
Higher Education Act, it should heed Friedrich to rely on the federal government to fund their
Hayek’s warning that democracy is “peculiarly higher education, and the federal government
liable, if not guided by accepted common princi- uses this financing to affect the behavior of state
ples, to produce over-all results that nobody want- and private institutions, we should be concerned
ed.” One result of the federal government’s stu- about how the resulting loss of independence of
dent financial aid programs is higher tuition costs our colleges and universities affects the ability of
at our nation’s colleges and universities. Basic eco- voters to form opinions about public policy that
nomic theory suggests that the increased demand are independent of the government’s position.
for higher education generated by HEA will have Rather than expand the current system,
the effect of increasing tuitions. The empirical evi- Congress should consider a phase-out of federal
dence is consistent with that—federal loans, Pell assistance to higher education over a 12-year
grants, and other assistance programs result in time frame. As the federal government removes
higher tuition for students at our nation’s colleges itself from student assistance, we should expect
and universities. several things to happen. First, sticker tuition
The diversity of objectives, resources, and prices should decline. Second, the private market
types of governance among the thousands of col- should respond to the phase-out of federal assis-
leges and universities makes it difficult to ade- tance. That response would likely take three
quately measure the exact amount by which forms: additional private-sector loans, additional
tuitions rise in response to federal student assis- private scholarship funds, and perhaps most
tance. Therefore, estimates of the amount vary in importantly, the expansion of human capital
the literature. Congress can at best know that its contracts. Human capital contracts, first sug-
policies increase tuitions and that some portion gested 40 years ago by Nobel Laureate Milton
of the federal assistance ends up being captured Friedman, would allow students to pledge a por-
by state governments and by the colleges and tion of future earnings in return for assistance in
universities. paying their tuition.
_____________________________________________________________________________________________________
Gary Wolfram is George Munson Professor of Political Science at Hillsdale College in Michigan.
Basic economic Introduction
oretical analysis and empirical evidence indi-
theory suggests cate that the federal government’s financial
Friedrich Hayek warned in The Constitution aid programs cause higher tuition costs,
that the increase
of Liberty that democracy was “peculiarly reducing the ability of some students to go to
in demand for liable, if not guided by accepted common college and causing others to attend a college
principles, to produce over-all results that that is not their first choice. Basic economic
higher education
nobody wanted.”1 As Congress readies itself theory suggests that the increase in demand
brought about
for reauthorization of the Higher Education for higher education brought about by the
by the Act, it should decide what the purpose of the system of grants and loans will increase the
act is and whether its component programs price of higher education.
system of grants
are accomplishing their intended goals. This year, Congress should consider the
and loans will Indeed, the current act, along with the various effect of federal tuition aid on college costs as
increase the price tax credits and deductions and other pro- it debates the reauthorization of the Higher
grams such as the GI Bill, has over the years Education Act of 1965.2Rather than expand
of higher
moved the federal government further and federal aid to higher education, Congress
education. further into the higher education market should phase out the current federal assis-
with insufficient debate over the goals of pro- tance program over a period of 12 years and
grams, their effectiveness in meeting those allow the charitable sector to provide assis-
goals, and the unintended effects on tuition. tance to college students. Congress should
Direct financial aid began as a way of pro- focus on developing the legal structure that
viding benefits to World War II veterans who would allow for a system of human capital
had been seriously underpaid, then moved to contracts, a proposal that was suggested by
grants to low-income students to expand Nobel Laureate Milton Friedman more than
access to higher education, and now includes 40 years ago and whose time has now come.
tax credits to help middle- and upper-income
parents face the cost of high tuition. The net
The System of Financial Aid
result is a mixture of programs that may have
results that Congress never contemplated. In
particular, there is a good deal of evidence The role of the federal government in
suggesting that federal financial assistance higher education has been a topic of interest
has the unintended consequence of increas- since the Founding. George Washington
ing tuition for all students. Federal aid may thought that we should have a national uni-
also result in a reduction in aid by state gov- versity.3The federal government helped estab-
ernments to students who attend universities lish land grant universities in the 19th centu-
in their state and a reduction in state appro- ry. Although we have no national university
priations to public colleges and universities. today, and the land grant universities are now
Individual colleges and universities may also primarily associated with the state of their
reduce their internal financial aid when their location, the federal government is heavily
students receive federal aid. In addition, fed- involved in higher education, subsidizing
eral aid reduces the independence of our attendance and using incentives to affect the
institutions of higher education. behavior of colleges and universities. It does
There are thousands of American colleges so with grants, loans, work-study programs,
and universities, both public and private. and tax credits.
Each institution has its own organizational The Bush administration’s 2005 budget
structure and operates under different objec- would provide $73.1 billion in overall federal
tives and constraints. As a consequence, there financial aid to students through the Depart-
is no single model of the effects of federal ment of Education under HEA, an increase of
grants, loans, and tuition tax credits on col- $4.4 billion over the 2004 level. The number of
leges and universities. Nevertheless, both the- students receiving assistance through grants,
2
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The empirical
loans, and work-study will reach 10 million,
up from 9.5 million in 2004.4 The primary HEA: Duct Tape and literature is fairly
programs that serve these students are the Unintended Consequences consistent in
Perkins Loan Program, Pell Grants, Federal
showing that
Supplemental Educational Opportunity As may be obvious from the plethora of
Grants, Federal Work Study Programs, the programs, the federal government has not student aid has
Federal Direct Student Loan Program, Federal thought out its proper role with regard to increased the
Family Educational Loans, and Federal Trio higher education or developed programs that
demand for
Programs.5The amount of direct student aid were designed to work together to accomplish
in the major programs provided in 2004 and a given goal. Indeed, as Robert Archibald higher education.
requested for 2005 is detailed in Table 1. pointed out in Redesigning the Financial Aid
The Department of Education has a num- System:
ber of other programs under various titles of
HEA, such as direct assistance to Howard Through the years, the (financial aid) sys-
University; the GEAR UP program, intended tem has evolved with changes in funding
to prepare low-income students for college levels, adjustments in rules, and the addi-
learning; and Aid for Institutional Develop- tion of programs. For the most part, this
ment. In addition to the programs in the evolution had been unplanned. On occa-
Department of Education, there are several sion, programs have been changed with
other programs that provide assistance to no thought to how other programs
higher education, including the Mont- might be affected. . . . The financial aid
gomery GI Bill.6 The Department of Educa- system of today resembles something
tion projects tax benefits from the higher that has been patched up many times
education tax programs to be $3.5 billion with duct tape, bailing wire, clothespins,
under the Hope Tax Credit, $2.2 billion and spit. It is dizzyingly complex, and is
under the Lifetime Learning Tax Credit, $2.6 not doing its job efficiently.8
billion for higher education expense deduc-
tions, and $780 million in deductions for The empirical literature is fairly consistent
interest paid on postsecondary loans in in showing that student aid has increased the
Fiscal Year 2005.7 demand for higher education.9 What is not
3
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Valid Applicants (millions)
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
YYeeaarr
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clear is what the different effects are on vari-
The Effect of Federal Aid on
ous income groups by type of aid. As Harvard
professor Susan Dynarski has recently point- Tuition Costs
ed out: “The effect of a given subsidy may vary
across groups due to relative differences in There is evidence to suggest that the HEA
financial positions, academic preparation, has been a factor in rising tuition costs.
access to information, the form taken by the Rising tuition costs then result in political
subsidy itself, and interactions of these fac- pressure to expand the HEA and provide tax
Before HEA is tors.”10 In this and a second paper, Dynarski credits and deductions for higher education
examined the effect of legislative changes in expenditures; this in turn increases tuition
reauthorized and
aid programs and found that, consistent with costs, which leads to further expansion of
Congress spends the other literature, financial aid increases HEA and use of the tax code to affect taxpay-
tens of billions college attendance.11 Thus, while it is not er behavior. This is the type of cycle that
known to what extent federal financial aid is Hayek and Ludwig von Mises suggest hap-
of dollars on
meeting the goals of the different programs, pens when government acts outside of its
financial aid, it what is clear is that federal financial aid has fundamental role and fails to take into
increased demand for college. Basic economic account how the market works.12Before HEA
should be fairly
theory shows that this increase in demand is reauthorized and Congress spends tens of
certain of the
will cause the unintended consequence of billions of dollars on financial aid, it should
effect of this increasing the price of higher education. The be fairly certain of the effect of this spending.
empirical question is simply: how much does The amount of federal (as well as state) aid
spending.
it increase tuition? has grown substantially over the past decade.
4
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For example, Figure 1 provides a recent his- As perfect correlation would yield a corre-
tory of federal government appropriations lation coefficient of 1.0, it is clear that feder-
for Pell Grants and valid applications for the al aid and tuition levels are very closely relat-
The fact that
grants.13 ed. Of course, although correlation certainly
there is a
Loans available from the federal govern- does not imply causation, the fact that there
ment have also grown. Perkins Loans rose in is a substantial correlation between tuition substantial
current dollars from $892 million in 1993 to and federal aid should at least raise the ques-
correlation
$1.263 billion in 2004. Federal Direct tion of how they are related, especially since
Student Loan Program and Federal Family almost 60 percent of all undergraduates between tuition
Educational Loans in current dollars went receive some form of student aid.16Economic
and federal aid
from $12.539 billion in 1993 to $52.197 bil- reasoning suggests that federal aid to higher
lion in 2004.14 education will have the effect of increasing should at least
At the same time, college costs have tuition. raise the question
increased dramatically. As the College Board
of how they are
has found, college costs began to increase at a
rate faster than inflation in the early 1980s. Theory of Subsidies related.
This has been a continuing trend.15In the 10-
year period ending in 2004–05, tuition and Any standard public finance text will
fees at four-year public colleges and universi- include a discussion of how taxes and subsi-
ties rose 51 percent and rose 36 percent at pri- dies are reflected in the prices of goods being
vate colleges in constant 2004 dollars. This taxed or subsidized.17The subsidy (or tax) is
trend has been accelerating in the past few partially shifted from the person legally
years. Average tuition and fees for in-state stu- receiving it to other actors in the economy.
dents at four-year public colleges and universi- The amount of shifting depends on several
ties rose by 10.5 percent to $5,132 in 2004–05. things, but the principal factors are the elas-
Private school tuition and fees rose 6 percent ticity of supply and demand of the good that
to $20,082. This marked the fourth straight is being subsidized (taxed).
year in which tuition and fees rose (in infla- To understand the effect of the federal stu-
tion-adjusted dollars) by more than 5 percent dent aid program, imagine a demand curve
at public four-year institutions. that represents how many students will pur-
Table 2 shows the results of simple corre- chase four years of college, and a supply curve
lation between tuition and total federal that represents how many spots will be avail-
financial aid at public four-year institutions, able at four-year colleges. As with any good, the
private four-year institutions, and public demand curve slopes down, indicating that as
two-year institutions over a 16-year period. tuition declines more people will purchase the
5
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$18,000
SS
$16,000
$14,000
$12,000
EE22
nn $10,000
oo
uitiuiti $8,000 EE11
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$6,000
$4,000
DDss
$2,000
DD
$0 0 5 10 15 20 25 30 35 40 45
0 5 10 15 20 25 30 35 40 45
SSttuuddeennttss
good, and the supply curve slopes up, indicat- quantity, and so the demand curve shifts up
ing that as tuition rises more higher educa- by the amount of the subsidy. This is repre-
tional services will be supplied. Figure 2 repre- sented by Ds in Figure 2.
sents such a scenario, with D representing the Notice that there will now be a new equi-
demand curve for higher education and S rep- librium, E2. In this case it will be at 25 million
resenting the supply curve. students and with tuition of $10,000. Notice
The market will reach equilibrium at E1, that the subsidy has created two effects,
with 20 million students and a price of increasing the number of students attending
If the number of
$8,000, where the number of spots that four- college, and increasing the amount of tuition.
available spots in year colleges made available equals the num- This is what federal aid to higher education
higher education ber of students who desire to attend. Now under HEA and various other programs is
suppose the federal government provides a doing. More students are attending college,
institutions rises
subsidy for attending college, say in the form but tuition is rising. The extent to which
very little as of Pell Grants. Suppose the grant was $4,000 tuition rises depends on the shapes of the
per student. The effect of this policy would demand and supply curves, or how responsive
tuitions rise, then
be to shift the demand curve up by $4,000. students and institutions of higher education
the increase in This is because at each number of students, are to changes in tuition.18
demand caused the net price would now be $4,000 less. For If the number of available spots in higher
example, before the Pell Grant, 20 million education institutions rises very little as
by federal aid will
students would be willing to pay $8,000 for tuitions rise, then the increase in demand
result in higher tuition. Now 20 million students would be caused by federal aid will primarily result in
willing to pay $12,000 for tuition, since after higher tuition costs for students. If the col-
tuition costs for
the Pell Grant their net tuition would again leges and universities increase their available
students.
be $8,000. This is true at every price and spots a good deal in response to rising
6
At least some
tuitions, then the aid will not have much effect to provide an empirical estimate of the supply
on tuition. of university enrollment in 11 Maryland uni- portion of the
The observant reader will notice that versities.22Their estimate for price elasticity is
increase in
given a downward sloping demand curve, the 1.94 for one specification of the model and
only way that tuition would not increase is if .97 for another. What this means is that for federal financial
the supply curve were perfectly horizontal, every one percent increase in tuition, the
aid that has
which would indicate that as a whole colleges number of places in those 11 universities
occurred over the
and universities expand to accept more and increases by between 1 and 2 percent. The
more students at the given market price for supply curve for these universities, at least, is years has ended
higher education. That does not seem to be a definitely upward sloping, so any increase in
up in the form of
reasonable assumption, as anyone who has demand will lead to an increase in tuition.
been rejected by a college will attest to. What should be clear is that although a higher tuition.
Unfortunately, there is little literature definitive measure of the elasticity of supply
regarding the elasticity of supply, or the is not well established, there is no evidence,
responsiveness of institutions of higher edu- either theoretical or empirical, that the sup-
cation to tuition changes.19This is no doubt ply would be perfectly elastic.23 This means
due to the lack of an accepted theoretical that at least some portion of the increase in
model of university behavior. As Judith Li federal financial aid that has occurred over
noted recently, “very little is currently known the years has ended up in the form of higher
about the objective functions of higher edu- tuition.
cation institutions.”20Her point is that econ-
omists aren’t sure what the goals of adminis-
Determining the Effects of
trations and boards of universities are.
However, there has been some recent work in Federal Student Assistance
developing a model of university behavior on Tuition
that leads to the expected conclusion that the
supply curve for higher education services is There are several situations that compli-
upward sloping and that the elasticity of sup- cate the issue of determining the amount by
ply is likely to vary by institution. which federal aid increases tuition. First, not
In the 1999 Journal of Economic Perspectives all students are eligible for the various grants
symposium on higher education, Gordon and loan programs that exist. Thus, some stu-
Winston built upon the earlier work of econo- dents will receive no subsidy but will be affect-
mists Michael Rothschild and Larry White to ed by the higher tuition. Second, the demand
provide an interesting discussion of the type of and supply for colleges is probably quite het-
market within which universities operate.21His erogeneous. Students may have inelastic
paper emphasizes the combined role of univer- demand for some colleges and elastic demand
sities as charitable organizations that rely on for others. For example, the demand for slots
donations for support and as producers of a at Harvard may be inelastic, while the
product in which students are both consumers demand for slots at Adrian College may be
and inputs. In other words, the quality of the elastic. The supply of slots at the University of
student body affects the quality of the educa- Pennsylvania may be inelastic, while the sup-
tion provided. The implications of his model ply of slots at Lake Superior State University
are that the elasticity of supply will vary across may be very elastic. Thus, federal assistance
types of institutions, from highly inelastic at may be passed on to some colleges and uni-
elite private universities such as Harvard to rel- versities and not to others.
atively elastic at for-profit non-elite institu- Another factor that makes it difficult to
tions such as the University of Phoenix. determine the final effect of the subsidy is
In their 2002 paper, Dennis Coates and that colleges and universities may reduce
Brad Humphreys use a model of bureaucracy their own internal financial aid in response to
7
federal financial assistance, while maintain- in tuition at public colleges and universities
ing tuition levels. Thus, net tuition increases led to political pressures at the federal level
in response to increased federal aid, while the that increased federal financial aid. However,
“sticker price” remains the same. Bowdoin the data is also consistent with a scenario in
College evidently took this action in response which the states were able to reduce the
to the 1997 enactment of federal tax credits growth in appropriations and increase
for higher education expenditures.24After the tuition due to increased financial aid at the
legislation was passed, Bowdoin announced federal level.
that it would not increase tuition in response Certainly, Congress and others have been
to the new federal subsidy, but that it would aware that providing financial assistance for
be reducing the amount of financial aid it higher education may result in higher tuition
provided to students who qualified for the tax costs. In a 1987 New York Timeseditorial, then
credit. secretary of education William Bennett de-
A major complicating factor is that state clared: “If anything, increases in financial aid
governments are highly involved in the pro- in recent years have enabled colleges and uni-
duction and subsidization of higher educa- versities to blithely raise their tuitions, confi-
tion. Thus, the federal financial aid may be dent that Federal loan subsidies would help
Colleges and
passed to state governments if state govern- cushion the increase.”27This became known
universities may
ments reduce their appropriations to higher as “the Bennett hypothesis.”
reduce their own education or reduce state financial aid. For Former education secretary Chester Finn
example, the state of Michigan has been fac- discussed congressional reaction to the
internal financial
ing a budget crisis over the past two years. If effects of the World War II GI Bill in his 1978
aid in response to state legislators know that the federal gov- book Scholars, Dollars and Bureaucrats. The
ernment is going to increase programs under original bill separated the veteran’s payment
federal financial
HEA, the legislators may reduce appropria- into a stipend that went to the veteran to
assistance while
tions to the University of Michigan, knowing cover living expenses and a payment that
maintaining that, at least for the less affluent students, went to the college to cover tuition. As Finn
the net tuition will not rise. The net effect of relates: “Unfortunately the separate tuition
tuition levels.
federal grants may be that the state appropri- payment provisions proved unworkable, as
ation is reduced and tuition at state universi- colleges raised their charges to exploit it and
ties rises so the state is able to capture some the Veterans Administration found itself hav-
of the federal assistance in the form of a ing to negotiate rates and fees with hundreds
reduced higher education budget. of institutions.”28
This is, of course, consistent with what Another example of how financial aid can
has been happening. Although state appro- lead to tuition increases is recorded in a 1980
priations for higher education at public uni- book, The Financing of Public Higher Education,
versities have increased over the past 20 years, written by Jacob Stampen, a senior research
they have not been rising as fast as tuition. As associate at the American Association of
a consequence, state appropriations have State Colleges and Universities. Stampen dis-
been a declining share of revenue at public cusses how tuition came to be adopted at the
universities while tuition and fees have been City University of New York:
an increasing share.25In 1981 state appropri-
ations made up 45.6 percent of revenue at In 1976, as a result of New York City’s fis-
public degree-granting institutions of higher cal crisis and other factors, tuitions of
education. By 2000 the share of revenue from $750 for freshman and sophomores and
state appropriations had fallen to 35.8 per- $700 for juniors and seniors were adopt-
cent. Tuition and fees rose during the same ed by CUNY. The abolition of free tuition
period from 12.9 percent of revenue to 18.5 was made possible, in part at least, by
percent.26 Again, it may be that the increase increased availability of student aid
8
funds, according to some New York offi- pointed out in her 1999 study of the effect of
cials. Theodore Hollander, deputy com- Pell Grants, “there have been surprisingly few
missioner of education for New York at studies on the impact of federal financial aid
the time, explained that if tuition were on college tuitions.”33
made necessary by the fiscal crisis, it was A comprehensive search of the literature
made feasible by New York’s large state yielded ten papers that dealt with the ability of
student-aid program and the rapidly colleges and universities to capture for them-
expanding federal Basic Educational selves federal student aid in the form of higher
Opportunity Grant Program.29 tuition or reduced in-house assistance. Of
these ten, eight found evidence that federal aid
Stampen also points out: showed up in higher tuitions or smaller insti-
tutional scholarships. One of the two that
Nowhere in the Act of 1965, the High- found no evidence of tuition increases admit-
er Education Amendments of 1972, or ted to the poor explanatory power of its model
the MISAA (Middle Income Student and the other looked only at large public
Assistance Act) of 1978 is there any research universities. Some of the authors in
statement providing guidance or estab- the eight supporting studies found evidence of
lishing objectives regarding institution- public institutions increasing tuition, while
al tuition level vis-à-vis federal student others found that private institutions in-
aid. Because of this, each institution creased tuition. The complications of identify-
faces the choice of maintaining tuitions ing what portion of change in tuition is due to
at the lowest possible level or of raising federal aid, the variety of models, differences in
tuitions to “harvest” the federal student the data being used, and the varying ability of
aid as an indirect institutional sub- state governments to capture some of the aid
sidy.30 by lowering appropriations to public universi-
ties, are no doubt factors that result in different
Congress has recently taken note of this, estimates of the magnitude of the effect of fed-
as a number of House Republicans proposed eral aid. However, there is enough evidence to
legislation that would have made colleges conclude that federal aid has been a factor in
and universities that raised tuition too rising tuition in our higher education system.
Private four-year
steeply ineligible to receive work-study dol- Judith Li found, using data on individual
lars and other federal grants.31 Though the students and institutions, that private four- colleges increased
bill was later withdrawn, it drew further year colleges increased listed tuition prices by
listed tuition
attention to the possible link between finan- more than two dollars for each dollar
cial aid and tuition increases. increase in Pell Grants, and public four-year prices by more
colleges increased their listed tuition by 97
than two dollars
cents for every dollar increase.34 She found
Empirical Evidence of the for each dollar
that public four-year institutions were able to
Effect of Federal Financial increase net tuition by 68 cents for every dol- increase in Pell
Aid on Tuition lar of Pell Grant increase, while private four-
Grants, and
year institutions raised their net tuition by 60
Most empirical studies of the effect of cents. That means that both public and pri- public four-year
financial aid have focused on its effect on stu- vate colleges and universities actually raised colleges increased
dent enrollment.32As discussed above, this lit- tuition by more than the amount of the Pell
their listed
erature is fairly consistent in its conclusion Grant. Li did estimate that public two-year
that federal financial aid increases the demand institutions decreased tuition, 17 cents for tuition by 97
for college enrollments, and thus indicates net tuition and 18 cents for list tuition, for
cents for every
that one result of these federal programs is an every dollar increase in Pell revenue. She also
dollar increase.
increase in tuition. However, as Judith Li noted that since tax credits might be more
9
Four-year public
transparent to colleges and universities than and Shapiro give for the lack of private col-
universities raised Pell grant awards, the response to tax credits lege response is that Pell Grants are a small
might be greater than for Pell Grants.35 fraction of the total tuition cost at private
tuition in
Sarah Turner, in her 1997 University of universities, and students at private universi-
response to the Michigan PhD dissertation, examined data ties are already borrowing the maximum
on individual students and found that reduc- guaranteed student loan.39Thus, the univer-
introduction
tions in net tuition (list tuition minus grants) sities cannot raise tuition and directly cap-
of federal tax
for students receiving Pell Grants were less ture the additional federal funds from the
credits. than the amount of the Pell Grant. This assisted students. This argument makes
would occur if colleges and universities sense, but doesn’t consider the effect of the
raised their tuition in the presence of Pell general increase in demand that results from
Grants, or if they substituted Pell Grants for federal financial aid. Even if only a fraction of
their own institutional aid.36 students receive student aid, the shift in the
Rebecca Acosta, in her 2001 UCLA work- demand curve as discussed above will raise
ing paper, “How Do Colleges Respond to the equilibrium level of tuition, thus affect-
Changes in Federal Student Aid?” used insti- ing all students.
tutional data to examine the effect federal In a recent paper, “The Impact of Federal
grants and loans had on tuition.37She found Tax Credits for Higher Education Expenses,”
that for every dollar in additional federal grant Bridget Long found that many states
aid, private four-year institutions increased reduced appropriations to two-year public
tuition revenues by $3.24. They did offset colleges that had low tuition levels, and that
some of this increase in tuition by increasing these same colleges raised tuition in response
their in-house financial assistance by $1.48. to the tax credits.40 Her analysis suggested
The net effect was an increase in net tuition of that four-year public universities, especially
$1.76 for every dollar increase in federal grant those that charged lower tuition, raised
aid. For every dollar increase in federal loans, tuition in response to the introduction of
these institutions increased their tuition rev- federal tax credits. She looked at relative
enue by $1.30. Again, they offset some of this tuition trends in low-price private colleges
tuition increase by increasing their internal aid and universities against high-price universi-
by 58 cents. This gave them a net tuition ties and did not find a significant difference.
increase of 72 cents for every dollar of federal She interpreted this to mean that since there
loan aid. She found some evidence that public is a slightly higher incentive to raise tuition at
institutions responded to increased federal the lower-price universities, the private-sector
grant aid by reducing institutional aid, and institutions might not have responded to the
increasing tuition. She did not find evidence tax credits by raising prices. But she did note
that federal loans were captured by public uni- that there may be a number of reasons for
versities in the form of higher tuition or this lack of difference in trends and that
reduced in-house aid. there might be a response in the private sec-
In their 1991 study for the Brookings tor. She noticed that her finding of a lack of
Institution, McPherson and Schapiro devel- student enrollment response to the tax cred-
oped a model to estimate supply-side effects its is consistent with the tax credits having
of financial aid.38 Using institutional-level the effect of raising tuition.
data from the 1978–79 and 1985–86 acade- Although not designed to look at the effect
mic years, they came to the conclusion that of federal assistance on tuition, a study by the
four-year public colleges raised tuition $50 National Center for Education Statistics used
for every $100 in federal student aid. They data from the 1993 and 2000 National Post
did not find evidence that private four-year Secondary Student Aid Study to look at net
colleges raise their tuition in response to fed- tuition and total cost changes after the expan-
eral student aid. One reason that McPherson sion of student loans under the amendments
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