Bennett Hypothesis: Does Student Aid Raise Tuition?

In 1987, then-Secretary of Education William Bennett wrote an op-ed in the New York Times called “Our Greedy Colleges.” In his article, Bennett focused on the increasing cost of attending college and lackluster outcomes. One sentence in particular caught readers’ eyes and has since been dubbed the Bennett Hypothesis: “Increases in financial aid in recent years has enabled colleges and universities blithely to raise their tuition, confident that Federal Loan subsidies would help cushion the increase.” Below I examine some trends in student aid as well as arguments for and against the Bennett Hypothesis.

Tuition and fees is the average cost for a full-time student in all degree-granting postsecondary institutions. Average Pell grant expenditure is the federal expenditure on Pell grants divided by the total number of students at degree-granting postsecondary institutions. Average federal loans per student is federal expenditure on the Direct Loan Program, Federal Family Education Loan Program, and Perkins Loans divided by the total number of students at degree-granting postsecondary institutions.

Since the 1985-86 school year, tuition and fees and average federal loans have increased 304% and 278% respectively. In this same time period, average Pell grant expenditure was relatively constant before increasing 119% between 2001-2002 and 2010-2011. This shows that student aid and tuition increases seem to track together, but does this imply tuition increases are caused by subsidized federal aid?

The case for the Bennett Hypothesis

Many have argued that the Bennett Hypothesis is correct (as well as here, here, and here). They often use the same economic premise – providing a cost subsidy in the form of loans or grants will increase demand for higher education. As demand increases more quickly than supply, quantity will increase but so will prices. While this is true under basic economic theory, the U.S. economy is much more complex and many other factors are probably at play.

The case against the Bennett Hypothesis

In a 2001 study of ten years of tuition and financial aid data, the National Center for Education Statistics found “no associations between most of the aid variables (federal grants, state grants, and student loans) and changes in tuition in either the public or private not-for-profit sector.” The National Commission on the Cost of Higher Education found “no conclusive evidence that loans have contributed to rising costs and prices [of college].” Another article calls the Bennett Hypothesis an “urban legend,” with “15 years of federal research… [that has] found no link between student aid and tuition increases.”

So do federal subsidies cause a direct effect on tuition inflation?

At best, it’s ambiguous. While the research doesn’t suggest causality, it may indeed show correlation. Bennett put it best himself: “federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.”