What is the relationship between tuition and financial aid?

The answer to this question depends on whether this issue is institutional grant aid or federal and state financial aid.

Institutional grant aid reduces the tuition prices facing students. It allows institutions to charge different prices to different students—frequently based on their financial circumstances but sometimes based on their high school grades, test scores, athletic ability.

When colleges raise their tuition, they frequently increase their aid budgets to help students pay the higher prices. But giving these discounts means the college gets less revenue relative to the published price. So, there is a close relationship between sticker prices and institutional grant aid.

Federal and state financial aid is different. Some people argue that the simple forces of supply and demand mean that when the government gives students more money, colleges will raise their prices. This idea is sometimes called the “Bennett Hypothesis” (after former U.S. Secretary of Education William Bennett, who popularized the idea in 1987).

The empirical evidence about this impact is weak—outside of the for-profit sector. But even if this aid does put upward pressure on sticker prices, it’s a small price to pay. The point of the federal student loan and grant programs is to increase demand for college. Without federal student aid, lots of low- and moderate- income students would not go to college—they simply would not be able to pay. So, if we can make higher education possible for more people, it’s a fair trade-off that there might be some upward pressure on sticker prices.

Explore more in “Financial Aid and Enrollment: Questions for Boards to Consider”

Should all public colleges—or all community colleges—be tuition free for all students?

There is an active movement among states to make community colleges tuition free. Tennessee was the first state to implement such a policy and the Obama administration proposed a related idea at the national level. Several states have followed Tennessee’s lead and New York recently passed legislation that will eliminate tuition for students from households with incomes below $125,000 at both two-year and four-year public institutions.

There are a number of problems with these policies. The central issue is that students don’t just need lower prices to succeed in college. They have to attend institutions that have sufficient resources to offer the courses they need, provide academic and social support systems, and ensure quality. Promising zero tuition is likely to limit the resources available to provide these important services, even as state funding per student has declined dramatically over time.

Another issue is that the state programs tend to be “last dollar” programs. They fill in the gaps between federal and state need-based aid and tuition prices. Many low- and moderate-income students already have their tuition paid through these need-based programs. So the extra dollars will just go to those whose incomes are too high to qualify for other aid. Unlike need-based programs that attempt to level the playing field, free college programs tend to provide equal subsidies to rich and poor alike.

Why is tuition rising so rapidly?

No one is happy about how fast tuition and fees are rising at colleges around the country. But there is a lot of misunderstanding that can interfere with our ability to address the issue. Prices actually rose less rapidly from 2005 to 2015 than in previous decades. This does not mean the price increases are not a problem, but it does mean it is reasonable to look beyond recent patterns to understand them.


Explore more in “College Endowments, College Prices, and Financial Aid”