New NBER Research Says Financial Aid is to Blame for Rising Tuition Costs

Finance
Posted By Eliana Osborn on March 2, 2016 at 9:37 am
New NBER Research Says Financial Aid is to Blame for Rising Tuition Costs

Are fancy computer labs and Olympic-size pools leading the ever increasing cost of college in America? How about pricey professor salaries or robotics labs?  A new report from the National Bureau of Economic Research (NBER) finds a much simpler answer: financial aid.

Accounting for the Rise in College Tuition used a model to determine what has led to the dramatic increase in tuition since 1987. Authors Grey Gordon and Aaron Hedlund took into account changes in costs generally, earnings, and federal student loans.

“From 1987 to 2010, sticker price tuition and fees ballooned from $6,600 to $14,500 in 2010 dollars. After subtracting institutional aid, net tuition and fees still grew by 78%, from $5,790 to $10,290. To provide perspective: had net tuition risen at the rate of much-maligned healthcare costs, tuition would have only reached about $8,700 in 2010.”

If no one is getting wealthy in the world of higher education, what accounts for this 78% overall increase? Some have predicted that it is a function of supply and demand; as more people want a college degree, because of the associated earnings boost, schools can charge more. This ‘premium’, as Gordon and Hedlund call it, is responsible for 24% of tuition increases.

Another contribution to rising tuition is the reduction in government support for colleges and universities. “State and local funding for higher education fell from $8,200 per full-time-equivalent (FTE) student in 1987 to $7,300 in 2010, all while underlying costs and expenditures were rising.”

This and other ‘supply-side’ issues actually account for a 6% decrease in tuition, according to the model. For example, the fixed costs to operate a college more than doubled over the timeline. “To pay for the higher fixed cost, the college lowers per-student investment and increases enrollment, which lowers average tuition by a composition effect.”

The biggest factor the authors discovered concerns changes to federal financial aid, whether loans or grants. The many components of these shifts are complicated but include the creation of unsubsidized student loans in 1992. Total borrowing for college jumped 56% between 1987 and 2010, from $26,200 to $40,800. These “expansions of borrowing limits drive 40% of the tuition jump,” more than any other cause.

Overall, lower income families have students attending college in greater numbers because of aid available to them. High-income families continue enrollment, able to pay tuition costs. Middle earning families and students are those stuck, as their grant access goes down with each dollar more their parents earn. That’s where the addition of unsubsidized loans comes into play as these students must borrow. Afraid of losing enrollment, schools expand grant programs for this category of student, money that must come from somewhere.

The many factors involved in college finance aren’t for the faint of heart.  Gordon and Hedlund’s model breaks down which actions have had the most impact on tuition increases.  Changing course, backing down from higher and higher amounts of aid, will be tricky.

Eliana Osborn
Eliana Osborn is an associate English professor at Arizona Western College, with degrees from Brigham Young University and Northern Arizona University. She’s published widely in forums such as The New York Times, the Washington Post, the Christian Science Monitor, and the Chronicle of Higher Education.

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