Should an Increase in Financial Aid for Colleges Result in Raised Tuition?
The Bennett Hypothesis 2.0 For the Center of College Affordability and Productivity
Secretary William J. Bennett previous made the claim that “financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.” This led to the Bennett Hypothesis which claims that increases in financial aid across all institutes of higher learning do not necessarily imply an improvement in college affordability. The hypothesis holds that colleges will raise tuition when they receive more total financial aid for students in the college. At this point the obvious subject of interest should be the treasury for any such college. The funds for the college should be increasing with the college gaining more tuition money and financial aid not coming out of the college’s funds.
How college financial aid grants work is essentially based on the standing of the college in the eyes of the Education Bureau of the Government. So for any school that offers financial aid in the United States, their accommodations for students, academic programs, acceptance rates and number of students, and turnout rate are all taken into account when FAFSA deems to raise or lower financial aid given to certain schools. The Bennett Hypothesis, which states that when a school gains an increase in financial aid standing, the school will raise its tuition, implies that the leftover money. The use for this leftover money is what interests us, for if we assume that the college uses its leftover money to boost academic programs, student accommodations, etc. then the college should gain rank in the eyes of the Education Bureau. As we said earlier, higher standing programs in the eyes of the Education Bureau lead to more financial aid grants, and thus we can see a cycle.
In a small case example, let us assume that we are analyzing two colleges A and B. We do not know how the Education Bureau ranks these colleges, so for convenience, as it also applies many of the same factors into its ranking, we will use US News and World Report college ranking. In this ranking, for one college to rise in ranking in order to “secure more financial aid,” another college must fall in rank because what we are looking at is a zero-sum game. Now if we assume that both colleges A and B recently got increases in financial aid, we now have a model of a problem similar to that of a prisoner’s dilemma problem. If college A increases its tuition and B does not, then we assume A rises in rank and gains more financial aid further down the road while B falls in rank. If both colleges raise their tuition, we know that this is a zero-sum game so neither college will rise in rank, and their student attendance might drop due to higher tuition rates but stagnancy in rank. If both colleges do nothing to their tuition however, they remain at the same position.
The graph above represents the situation with a “1” showing a rise in rank, a “-1” showing a fall in rank, and a “0” showing stagnancy. We realize that the strictly dominant strategy for each college is obviously to raise their tuition in hopes of rising in rank. Obviously an increase in financial aid means the student should in theory have to pay roughly the same even with tuition raise, however as the government slowly curbs the amount of financial aid being granted, the question of whether colleges will slow down the increase in financial aid remains.