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Introducing Bennett Hypothesis 2.0

Over the past quarter century, a debate has raged within higher education policy circles over whether or not federal financial aid dollars contribute to college tuition increases. The theory that federal financial aid subsidies do enable colleges to raise their tuitions, a theory championed by former U.S. Secretary of Education William J. Bennett, has never been fully vindicated nor fully discredited by the evidence. This study provides additional refinements to the so-called “Bennett Hypothesis” by explaining the conditions under which federal financial aid can and does aid tuition increases and the conditions under which those aid programs (due to more effective targeting and design) provide little to no role in tuition increases.

By Andrew Gillen | February 2012

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Introduction

A quarter of a century ago, then Secretary of Education William J. Bennett made waves by declaring:

If anything, increases in 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.[1]

From that point forward, the notion that increases in financial aid cause increases in tuition has gone by the moniker of the Bennett Hypothesis, and its validity has been hotly debated ever since.

Many within higher education view the idea as preposterous. Most colleges are public or non-profit, so how could they possibly be greedily seeking “profits”? At the same time, many observers of higher education view it as an accurate depiction of reality. As Arthur Hauptman has noted, “just as one couldn’t imagine house prices being as high as they now are if mortgage financing were not available, it is difficult to believe that colleges and universities could have increased their charges so rapidly over time without the ready availability of students’ ability to borrow.”[2]

Scholars have found evidence that contradicts the notion, but they have also found evidence that confirms the idea, which has allowed both opponents and supporters to claim vindication. In this paper, I argue that all the mixed evidence and subsequent controversy is a consequence of an overly simplified view of the Bennett Hypothesis. Tweaking the concept to account for a more realistic view of who receives financial aid, the actions available to colleges, and the nature of competition in higher education leads to predictions that are more consistent with the data than the original hypothesis or its antithesis. The three refinements are:

  1. All Aid is Not Created Equal
  2. Selectivity, Tuition Caps, and Price Discrimination are Important
  3. Don’t Ignore the Dynamic Story

Collectively, these changes to the original theory yield what I call Bennett Hypothesis 2.0. As we will see in the sections that follow, these changes help explain the mixed empirical evidence and offer a more accurate understanding of the relationship between financial aid and tuition.

Download the entire report (pdf, 28 pp.)


Notes

[1] William J. Bennett, “Our Greedy Colleges,” The New York Times, February 18, 1987.

[2] Arthur M. Hauptman, “Class Differences in Room for Debate, Rising College Costs: A Federal Role?The New York Times “Room for Debate” Blog, February 3, 2010.


Andrew Gillen is the Research Director at the Center for College Affordability and Productivity. He received his PhD in Economics from Florida State University.