Does Federal Aid Drive College Tuition?

In this article, experts present a simple enrollment management model of how nonprofit colleges jointly decide how to fill their classes and set tuition. Any vice president for enrollment will recognize this model as a close representation of how these decisions actually are made. This simple theoretical structure often is missing from popular discussions of how federal policy affects affordability, and from empirical tests of possible links between aid and tuition. The enrollment management model does not prove kind to the idea that federal aid causes tuition inflation at nonprofit institutions. On the other hand, there is good evidence for a Bennett effect at for-profit schools, whose behavior is better represented by the textbook model. Although Archibald and Feldman’s theoretical framework finds no incentive for most colleges to adjust their tuition in response to changes in federal aid, institutions can “tax” away a part of the federal aid by reducing their own institutional aid. Schools can redirect those resources to other institutional uses. However, unless this tax rate implausibly exceeds 100%, students will still see lower net price tuition. The best evidence on the tax rate is that it is low overall, but higher at highly selective private institutions that are very generous with their own aid.

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