MERCATUS RESEARCH

MERCATUS RESEARCH

GOVERNMENT POLICY AND TUITION IN HIGHER EDUCATION

Angela K. Dills, Rey Hern?ndez-Juli?n, Nathan Hale

Bridging the gap between academic ideas and real-world problems

ABOUT THE MERCATUS CENTER AT GEORGE MASON UNIVERSITY The Mercatus Center at George Mason University is the world's premier university source for market-oriented ideas--bridging the gap between academic ideas and real-world problems. A university-based research center, Mercatus advances knowledge about how markets work to improve people's lives by training graduate students, conducting research, and applying economics to offer solutions to society's most pressing problems. Our mission is to generate knowledge and understanding of the institutions that affect the freedom to prosper and to find sustainable solutions that overcome the barriers preventing individuals from living free, prosperous, and peaceful lives. Founded in 1980, the Mercatus Center is located on George Mason University's Arlington campus.

Copyright ? 2013 by Angela K. Dills, Rey Hern?ndez-Juli?n, Nathan Hale, and the Mercatus Center at George Mason University

Mercatus Center George Mason University 3351 Fairfax Drive, 4th floor Arlington, VA 22201-4433 (703) 993-4930 Release date: December 16, 2013

ABOUT THE AUTHORS

Angela K. Dills is an associate professor of economics at Providence College, with an expertise in the economics of education. Her research on education considers a variety of issues in elementary, secondary, and postsecondary education. She has studied the potential benefits of college quality, the role of class time on academic performance, high-stakes testing, peer effects, teacher quality, class size, recess and physical education, and Catholic schools. Her work has been published in a variety of outlets, including Economic Inquiry, Journal of Health Economics, Economics of Education Review, Education Finance and Policy, Education Economics, and Economic Letters. She also serves on the editorial board for the Eastern Economic Journal.

Rey Hern?ndez-Juli?n is an associate professor of economics at the Metropolitan State University of Denver. His research focuses on the economics of education. He has examined how course scheduling, transfer-college quality, merit-based scholarships, and athletic achievement are determinants in the performance of students in higher education. He has also studied the relationship between school choice and noneducational outcomes, economic freedom and migration, and scandal and Catholic schooling. In separate research, he has examined the relationship between fertility and health outcomes in developing countries.

Nathan Hale is currently a master's student in economics at George Mason University. He is also an MA Fellow at the Mercatus Center, where he has assisted scholars with research bridging the gap between academic ideas and real-world problems, and he works in the Fire and Aviation Management division of the US Forest Service performing planning- and budget-related tasks. His past research has focused on OSHA and the poultry industry.

MERCATUS CENTER AT GEORGE MASON UNIVERSIT Y

ABSTRACT Tuition and fees for higher education have increased at a rate much higher than inflation over the past 40 years. Although the amount students pay has risen much less than listed tuition, net price also continues to increase faster than inflation. Taxpayerfunded subsidies to higher education have also increased substantially during this period. The Bennett hypothesis states that tuition will increase in response to subsidies. We review the variety of government programs subsidizing higher education and summarize the existing evidence on the Bennett hypothesis. The evidence on the Bennett hypothesis remains mixed, providing some evidence that the effectiveness of the subsidies in increasing college enrollment is diminished to the degree that taxpayer moneys are diverted to the institutions of higher education. JEL codes: H52, H75, I22, I23 Keywords: higher education, tuition, Bennett hypothesis, subsidy, Pell Grant, federal loan program, college costs

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I. INTRODUCTION

Listed tuition--essentially the sticker price--for US colleges has increased significantly, even after adjusting for inflation. For all institutions of higher education, that increase averages 71 percent since 1990 and 36 percent since 2000.1 Tuition has increased faster in public, four-year institutions, where the increase has averaged 126 percent since 1990 and 62 percent since 2000, but listed tuition has increased in all categories--public and private, for-profit and not-for-profit, two-year and four-year. Private schools' prices started in 1990 at much higher absolute levels, so although their increases since then have generally been lower in terms of percentage, they were often higher in terms of dollar amount.

In the 2013 State of the Union address, President Obama stated that "taxpayers cannot continue to subsidize the soaring cost of higher education. Colleges must do their part to keep costs down, and it's our job to make sure they do." In the same speech, the president argued that policies such as tax credits, grants, and subsidized loans have been important policy tools to "make college more affordable." In 2007 President George W. Bush signed into law a bill that increased the maximum Pell Grant award--in order, he said, to "help millions of low-income Americans earn a college degree."2 Both presidents failed to mention that the policies they supported could themselves have been responsible for some of the increase in tuition. Considering two effects of the subsidies--direct price reduction and higher sticker prices--at the same time is important for understanding the intended and unintended consequences of higher education subsidies.

Academic research highlights a variety of explanations for rising tuition. These explanations center on three main factors: the rising costs of providing higher education, the increased demand for higher education, and certain changes in government

1. Authors' calculations from Thomas D. Snyder and S. A. Dillow, Digest of Education Statistics 2011 (NCES 2012-001, National Center for Education Statistics, Washington, DC, 2012), table 349. 2. Associated Press, "Bush Signs Tuition-Aid Bill He Had Opposed," NBC , September 27, 2007, ; George W. Bush, "Remarks on Signing the College Cost Reduction and Access Act," September 27, 2007, published in Public Papers of the Presidents of the United States: George W. Bush (2007, book 2) 1244?46, .

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