Twenty-five years ago this past Saturday, then-Secretary of Education William J. Bennett argued in a New York Times essay called "Our Greedy Colleges" that “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.” Ever since, the notion that colleges raise tuition to capture financial aid has gone by the moniker of the Bennett Hypothesis.
Scholars have tested the Bennett Hypothesis for two and half decades and the result is a mountain of evidence that neither rejects nor confirms the notion. While no study has found that a $1 increase in aid leads to a $1 increase in tuition, a significant number of studies find that the effect on tuition is not $0, meaning that the tendency of many within higher education to label the Bennett Hypothesis a myth is not justified.
Given the ambiguous evidence, it is clear that the theory needs revision. And indeed, a few refinements go a long way toward reconciling the theory’s predictions with the empirical data, indicating that the original theory was oversimplified.
The first refinement accounts for the fact that aid directed toward low-income students (such as Pell Grants) is much less likely to lead to higher tuition than is aid directed at relatively rich students (such as the higher education tax credits). Aid restricted to low-income families allows students who were previously priced out of higher education to attend, without giving colleges the ability to raise tuition without again pricing these students out of higher education. That is not the case with aid given to relatively affluent students who will attend college regardless of price.
The second refinement is to note that many public colleges are subject to explicit or implicit caps on tuition by their state legislatures, and that many private colleges are trying to become more selective to move up in college rankings. This means that rather than raise tuition as much as possible when aid is increased, many colleges will instead grow their applicant pool, allowing them to become more selective.
The third refinement introduces Bowen’s Rule, which refers to the tendency for colleges to raise and spend all the money they can in the pursuit of excellence. This sounds innocent enough, but the implication is that costs will rise whenever revenue rises. Because increases in financial aid give colleges the option to increase revenue, financial aid is partly responsible for the surge in spending by colleges.
This new and improved Bennett Hypothesis 2.0 is more reassuring than the original about the ability of financial aid to improve college affordability in the short term. Targeting aid to low-income students, placing caps on tuition increases at public institutions, and even negative publicity for colleges that raise tuition too much can all help restrain tuition increases.
But Bennett Hypothesis 2.0 tells a more depressing story in the long run. Because competition among colleges is based on their relative standing, those colleges that exploit the opportunity to raise tuition when financial aid is increased will be able to improve relative to those that do not by hiring better professors, offering more aid to attract meritorious students, building state-of-the-art laboratories, etc. To avoid falling behind, even those colleges that initially resisted are forced to follow suit and raise tuition.
The key lesson is that we need to be very careful when (re)designing financial aid programs to avoid the very real danger that financial aid money will be captured by colleges without improving college affordability.
The Los Angeles Community College District and the local district attorney are investigating spending by the director of a foundation that provides scholarships to needy students at Los Angeles Trade-Technical College, The Los Angeles Times reported. Rhea Chung's expenses included more than $9,000 on golf outings, spending of $2,300 at the Los Angeles Philharmonic and a $1,500 monthly car allowance. Chung, who has been placed on leave, told the Times that the spending was an appropriate way to provide access to potential donors.
"Student Voices," a website at San Francisco State University, has provided a way for students to tell their individual stories on the impact of tuition hikes at the institution. One student comments: "This year I had to take out two student loans and only had $90 left. Needless to say, I couldn’t buy some of my books right away and instantly fell behind in some classes. There are no more loans that I, as a student, can pull out." A veteran wrote: "I have to be very careful about what classes I take. Sections of classes I need to take have been closed because there aren't enough students to take them. I only have partial coverage from the 9/11 GI Bill, so I still have to pay 3 or 4 thousand in tuition and fees because I'm also an out of state student... This is the first semester that I've ever taken out student loans. I've managed to make it through college on scholarships so far, but the tuition increases make it more difficult to cover the cost of education."
An article in The San Francisco Chronicle details how the site was created out of a protest in which President Robert Corrigan and frustrated students started talking about their differing perspectives on tuition increases, and the need for legislators to better understand the impact of tuition increases.
A case study of the impact of Pell Grants on Kansas community colleges has found that a higher maximum Pell Grant has led to more students attending college, particularly in rural parts of the state. The study, released today by the University of Alabama Education Policy Center, found that Pell Grant dollars distributed to Kansas students nearly doubled between 2008 and 2010, and that enrollments at community colleges, including the proportion of students attending full time rather than part time, increased as well. In addition, the study found that "maintenance of effort" provisions in the 2009 federal stimulus law were successful at reining in state increases in tuition price.
The case study was part of a larger look at the impact of Pell Grants on rural community colleges published by the center earlier this year. "This report just explodes the myth that the Pell Grant program is an urban program," Stephen Katsinas, the director of the policy center, wrote in an e-mail to Inside Higher Ed. "Pell funding made a tremendous difference in Kansas."
Student loan debt was a problem long before Occupy Wall Street protesters added it to their list of grievances. The recession hit the younger end of the workforce particularly hard: the combination of a jobless recovery, rising tuition bills and mounting debt have become a crushing burden. Total student debt today is approaching one trillion dollars — exceeding the balance due on credit cards — and is second only to mortgage debt in American households. In fact, it's the only class of debt in which defaults are increasing. Given the state of the economy, much of this debt will never be repaid. It will remain an albatross weighing down an entire generation.
It's time to look ahead to a new paradigm, in which student loans are not the only answer. Let's consider the power of savings. Currently, we know scores of students never make it to college because they perceive it as financially out of reach. Others bail when they realize the debt burden will be too high. The cost proportionality of getting an education compared to the amount of borrowing necessary to finance it is way out of line. Students need a way to finance college without compromising their future financial well-being. Beyond efforts to limit tuition growth and create affordable educational options, there are significant advantages for placing a greater emphasis on savings.
A growing body of compelling research has illuminated the connection between savings and educational outcomes. Even modest-sized savings and asset holdings have the potential to alter the way people think about the future, which can lead to productive changes in behavior. For example, children with a savings account in their own name are more likely to have higher math scores than children without a savings account — scoring on average almost 9 percent higher.)
Studies have also shown savings are linked to expectations of high school graduation, academic achievement, and pursuit of postsecondary education.
Providing access to savings accounts can create a financial stake in college for students, and it’s a more effective strategy than simply advising them to save: if students have a tangible place to store funds, they are three to six times more likely to attend four-year colleges than youths with no savings. These accounts impel children to think about their postsecondary education. Opening the door to college motivates performance in certain ways, like staying in school and studying harder. And the earlier this starts, the better. Account ownership helps make the savings purpose more salient. We have observed that a college-bound identity takes shape long before children fully understand what it even means to go to college.
The concept of children's savings accounts has begun to take hold in a diverse set of countries including Britain, Singapore, Canada, and South Korea. In the U.S., 529 College Savings Plans have proven to be popular vehicles as earnings on deposits are tax-free. Unfortunately, to date they have had a limited reach among many households with modest incomes. That’s largely because the strength of the incentive to save is based on how much a family earns. If the family has a small tax bill or gets a refund, the incentive is particularly weak.
We should look for ways to advance more inclusive policies that create opportunities for more children. Early investments by the federal government in children’s future college plans may be less costly than bailing them out as young adults. Instead of waiting for parents to open accounts, let's make sure every child has an account to call their own.
One legislative proposal seeks to do just that. The America Saving for Personal Investment Retirement and Education (ASPIRE) Act would create accounts for every newborn. Each account would be seeded with a $500 contribution, and children in families earning below the national median income would receive matching funds for contributions of up to $500 each year. After account holders turn 18, they would be able to make tax-free withdrawals for multiple purposes, including the costs of postsecondary education. This is an approach that casts a wide net and allows all kids, regardless of the circumstances of their birth, to have a foundation for building their future.
How can the government fund these children’s savings accounts in the current economic slowdown? Through a system of tax preferences and direct spending, we already allocate $56 billion a year helping students pursue postsecondary education. Compare this to the $3.5 billion estimated cost to fund the ASPIRE Act during its first year. This approach can be tried at the local and state level. In fact, the City of San Francisco has begun offering each child entering public school a savings account. Their Kindergarten to College initiative (K2C) is a relatively low-cost investment designed to trigger significant returns, through increased savings, greater college access and degree completion, and lower debts.
If we think of children's savings accounts as a way to reduce ever-rising public expenditures on student loans, we can envision a more efficient, more hopeful, and more productive strategy for funding higher education. Instead of going into debt, young people could save money in advance.
Reid Cramer directs the Asset Building Program at the New America Foundation. William Elliott III is a New America Foundation Fellow and an assistant professor in the School of Social Welfare at the University of Kansas. This op-ed coincides with the release of a four-part series of reports, "Creating a Financial Stake in College," which focuses on the relationship between children's savings and improving college success, which is authored by Elliott and published by the New America Foundation and the Center for Social Development at the Washington University in St. Louis.
A majority of more than 800 bankruptcy lawyers in a survey say they have seen an increase in clients with student loans over the past few years and that most of those debtors are unlikely to be able to discharge their loans due to "undue hardship." The survey, published by the National Association of Consumer Bankruptcy Attorneys, found that 62 percent of the lawyers have seen bankruptcy cases involving student loans increase at least 25 percent since 2008. A paper published with the survey warns of a "Student Loan ‘Debt Bomb,' " and calls for restoring the ability to discharge student loans in bankruptcy.