Federal Student Aid and College Prices Notes

Summary

College affordability is a concern due to rising college prices.
There is debate on whether federal student aid contributes to these price increases.
This report analyzes the relationship between student aid and college prices.

Key Themes

Colleges use price discounting, reducing effective prices.
Government grants further reduce the price students pay.
College prices are measured as:
- Published prices
- Effective prices (net of discounts)
- Net prices (net of grants and discounts).
Prices have consistently increased faster than inflation.
Student aid per full-time equivalent (FTE) student has increased, but with volatility.

Explanations for Escalating College Prices

Declining state appropriations per student.
Fluctuating endowments.
Increased reliance on tuition revenue.
Escalating costs of high-skill labor and technology.
Multiple institutional missions.
Ineffective centralized cost control.
Productivity issues.
Incentives for raising and spending to enhance student experiences.
Inelastic demand for postsecondary education gives colleges pricing power.
Numerous plausible explanations make it hard to isolate single factors.

Research on Aid and Prices

Nine empirical studies have tried to isolate the effects of aid on prices.
Most studies focus on the effects of grant aid on prices.
Limited research on the relationship between prices and loans or tax assistance (available to broader income ranges).
Studies do not directly address whether colleges "capture" aid intended to lower net prices for specific students.
Primarily focused on broad institutional price responses.
Studies vary in:
- Research questions
- Theorized mechanisms of causation
- Analytical/methodological approaches
- Data selection and use
- Proxy measures for aid and price
- Model specification
- Universe of colleges and universities studied

Consistency of Findings

Findings across studies lack consensus.
Direction and magnitude of effects vary.
Changes in model specification or controls lead to different results.
Lack of a good measure of net price limits understanding of the relationship between aid and price.
Studies rely heavily on list price or proxies for net price.

Report Overview

Examines trends in college prices and student aid.
Explores explanations for increasing college prices.
Focuses on whether increases in student aid lead to price increases.
Reviews primary studies from the last decade that attempt to isolate the effects of increases in student aid on prices.

Introduction to Price and Cost Concepts

Rising college prices have received attention from federal policymakers.
College affordability is a focus of legislative proposals and presidential initiatives.
Federal government supports direct aid to postsecondary students (roughly $71\%$ of such aid).
Efficacy of federal aid programs has been questioned.
Challenge: determining the appropriate measure of price to track.

Defining Cost and Price

Cost: What institutions spend to provide education and related services.
- Supported by government appropriations, endowment revenue, and student payments.
- Only a portion is covered through student payments (subsidy).
Price: What students or families are asked to pay for higher education.
- Focus of this report is changes in college prices.
List prices: Published prices for tuition, fees, room, and board.
Colleges discount prices based on need or merit.
Net price: Amount a student pays net of grant and scholarship aid.
- Helpful to track for student affordability.
- Comprehensive historical data are lacking.
Net tuition revenue: Average tuition revenue per FTE student after institutional discounts.

Components a Student's Total Cost of Attendance

Tuition and required fees.
Room and board.
Transportation expenses.
Books and supplies.
Other expenses.
Eligibility for federal student aid programs is based on total cost of attendance.

Institutional Considerations

Focus on four-year public and private nonprofit institutions (serve roughly half of students).

Public vs. Private Nonprofit Institutions

Public: state-subsidized institutions, aim for affordable education for state residents.
- Tuition set by legislatures/boards; taxpayer contribution is considered.
Private nonprofit: tuition revenue covers costs.
- Consider revenue needs and peer institution prices; use tuition discounting.

Tuition Discounting

“Art and science of establishing the net price of attendance for students at amounts that will maximize tuition revenue while achieving certain enrollment goals.”
Economists call this “price discrimination.”
Used to fill seats, enhance academic profile, enable lower-income students to attend, and compete for financially desirable students.
Roughly $3/5$ of students at private nonprofit four-year colleges receive a discount.
Discount rates: measure the institution-wide percentage reduction in tuition revenue stemming from the award of institutional grant aid.
- Range from $27\%$ to $36\%$ at private nonprofit four-year institutions.

Tuition Discounting at Public Institutions

Prices are differentiated in another way as well through in-state and out-of-state tuition levels.
$11\%$ of students in public, nonprofit institutions are out of jurisdiction students.

Recent Trends in College Prices

College prices have consistently increased at rates outpacing inflation.

List or Published Prices Trends

In academic year 2011-2012, approximately $59.1\%$ of all undergraduates received some form of grant aid, effectively reducing the list price.
Increases in the average cost of attendance (COA) at both types of IHEs outpaced inflation in each year from academic years 2000-2001 to 2011-2012.
- The average annual increase above inflation at four-year public IHEs was $3.5\%$ , whereas, the average annual increase above inflation at four-year private, nonprofit IHEs was $2.4\%$ .

Net Price Trends

In the 2011-2012 academic year in constant dollars four-year public IHEs was 14,296\ and four-year private, non-profit IHEs was 23,001\. Academic Years 1999-2000. Four-Year Public was 11,559\ and Four-Year Private, Nonprofit was 18,570\.
Across the 12-year time period between AY1999-2000 and AY2011-2012, the average net price at four-year public IHEs exceeded inflation by $23.7\%$ and at four-year private, non-profit IHEs by $23.9\%$ .

Changes in Price Spanning Different Measures of Price

Each price measure, regardless of source or definition, outpaced inflation.
If the trend line for four-year public institutions in Figure 2, which depicts the average annual percentage change in the published cost of attendance (COA) compared to the average change in inflation, is expanded to include the period from AY1991-1992 to AY2011-2012, it would show that the published COA outpaced inflation, on average, by $3\%$ each year.

Recent Changes in Student Aid

In AY2002-2003 to AY2012-2013 average grant aid per FTE undergraduate student has increased by $57\%$ , Average federal loan aid has increased by $44\%$ , and average federal education tax credits per FTE has increased by $132\%$ .

Explanations for Price Increases

Student aid increases are theorized to be one factor contributing to price increases (primary focus of this report).
Other possible explanations are the main focus of the report.

Factors Contributing to Escalation of College Prices

Inflation: Economy-wide, the cost of goods and services rises over time, historically by an average of roughly $3.3\%$ , and over the last couple of decades by roughly $2.4\%$ , per year.
Cost Disease: Wages increase more rapidly in service industries that are labor intensive and primarily reliant on highly educated workers than they do elsewhere in the economy.
Demand: Basic economic principle is that when there is limited supply of a good, high levels of demand drive up prices.
Declining State Appropriations and Endowments Postsecondary education is financed through a mix of government appropriations, gift and endowment revenue, and payments for tuition and fees.

Factors From Howard Bowen

Revenue Theory: Institutions of higher education are principally focused on educational excellence, prestige, and influence, and that there do not seem to be many strict limits on the amount institutions are willing to spend in support of these aims.
Scholarships and Other Forms of Discounting A growing area of spending for colleges is on institutional student aid.
Higher Price Signals Higher Quality Institutions have an incentive to publish high prices given the perception that a high price is associated with a higher-quality product.
Productivity Critiques Practices, decisions, and organizing and governance structures at colleges are commonplace in literature on college costs and prices such as smaller class size and teaching loads, reluctance to seriously examine efficiencies that may accompany better uses of technology in instruction, tenure policies, faculty governance and a plurality of missions.
Product Bundling The “full service model” that colleges offer to students such as manicured lawns, state of the art dining halls, and residential and exercise facilities driving up prices.

Bennett Hypothesis

Increases in student aid may have the unintended consequence of leading to price increases.

Studies Examining Effects of Aid on College Prices

Generally, two lines of inquiry are reflected in the questions CRS receives:
- One set of questions focuses on recipients of aid, and there is a desire to know whether recipients of the aid are likely to realize the reduction in net price that is intended.
- Another set of questions focuses more broadly on whether there is evidence that increases in varied types of aid may inflate college prices.

Unraveling Questions about the Effects of Student Aid

An initial concern, when policy makers contemplate increasing the amount of aid made available to targeted populations if the aid is intended to enhance affordability for such students by lowering their net price, tends to focus on the likelihood that the full value of an increase will be realized by the aid recipients.

Concerns of Unintended Effects of Broadly Increasing Prices

This concern centers on whether the availability of additional student aid revenue signals colleges that an opportunity may exist to increase spending or prices or to rely more heavily on tuition revenue to cover costs.

Identification of Studies

Nine studies investigating the potential causal link between college prices and financial aid were Identified by CRS.
Overwhelmingly, the studies focus on a broad institutional price response, rather than the extent to which student aid actually reduces net price for recipients.

Measuring Change in Price

Not having the outcome measure of primary interest available—a good measure of net or effective price—is ultimately a substantial limiting factor in understanding the relationship between aid and price.
The lack of individual level data or thorough or precise institution level data leads to reliance on measuring change in list price or in average institutional grant aid per FTE student.

Establishing Causality

Studies on the relationship between grant aid and prices are limited by more general problems in social science research such as:
- Covariates. There is little to no consistency about the mix of covariates across studies.
- Direction of Causality.
- Instrumental Variables.
- Omitted Variable Bias.

Final Thoughts

The review of studies presented in this report suggests the body of research on the relationship between federal financial aid and college prices does not provide conclusive results in any direction.
Even if the relationship between financial aid and price changes is not clear cut, that absence of evidence does not mean that cause and effect does not exist.

Implications for Policy

It is sometimes suggested that there is asymmetry in the information available to those setting prices and those paying and subsidizing prices.
Additionally, existing studies are generally focused on a broad price response and not on effects on prices for aid recipients or subgroups of students.