# Presentation: 341627

## College Tuition Pricing and Federal Financial Aid: Is there a Connection?

- Testimony before the
- U.S. Senate Committee on Finance
- Dr. Bridget Terry Long
- Associate Professor of Education and Economics
- Harvard Graduate School of Education
- December 5, 2006

## Do colleges react to increases in federal student aid and tax benefits by raising their tuition prices? 

***The Concern***: Because government aid enables students to pay more, it could also induce colleges to raise their tuition prices
- If true, this type of institutional response could diminish the overall impact of an aid policy by reducing the net discount a student receives.
-  Important implications for student affordability and whether tax dollars are being used effectively

## How do we know if colleges are responding to aid by raising tuition? 

- The fact that aid has increased at the same time as tuition *does not prove* that colleges have responded to Federal Aid Policy
- Are recent increases in tuition prices due to aid or other factors related to college costs?
- Must isolate the effect of aid from all the other factors that influence college pricing (a difficult task)

## What does the Evidence say?There is no “Smoking Gun” in terms of college pricing behavior.

- Most studies find **little** to **no** response.
- Long (2004)
- Rizzo and Ehrenberg (2003)
- Singell and Stone (forthcoming 2007)

- Studies that find some evidence for particular types of colleges are plagued by **mixed** and **contradictory** results or **weak research designs**
- Long (2004): Inconsistent results
- Singell and Stone (2007): Results appear attributable to other factors

## The key outcome of interest should be Net Tuition Price (after financial aid)

**Public Four-years**: From 1996-7 to 2006-7
- Average ***List*** Price grew 49% to $5,800
- Average ***Net*** Price grew 29% to $2,700

- Source: College Board (2006).  Constant dollars.  Net price is calculated by subtracting average grant aid and tax benefits per FT student from the published price.

## The key outcome of interest should be Net Tuition Price (after financial aid)

**Private Four-years**: From 1996-7 to 2006-7
- Average ***List*** Price grew 32% to $22,200
- Average ***Net*** Price grew 26% to $13,200

- Source: College Board (2006).  Constant dollars.  Net price is calculated by subtracting average grant aid and tax benefits per FT student from the published price.

## The Importance of Net Price

- A better indicator of the reactions of colleges to government aid policy
- College could alter List Price *and* Institutional Aid awards in response to federal aid
- McPherson and Schapiro (1991) found increases in government aid were coupled with *increases* in institutional scholarships at private colleges

- A better sense of the costs students actually face  How are colleges using this money?

## Why are College Prices increasing? 

- Reductions in State Appropriations to public colleges and universities

## Reductions in State Subsidies 

**Revenue for Public Degree-Granting Institutions**

**Gov Approp.**

**Tuition**

**Reductions in State Subsidies **

## Why are College Prices increasing? 

- Reductions in State Appropriations to public colleges and universities

- 2.	The Increasing Costs of Faculty and Staff
- Aging labor force
- Health care costs

- 3.	The Rise of New Expenditures
- Technology
-  Student Services

- 4.	Growing Use of Institutional Financial Aid

## Reconsidering Financial Aid Policy

- Students have significant **unmet financial need** suggesting that federal student aid resources are critical to improving college access and success
- When designing an Aid Program, **Information** and **Simplicity** are Important
**All Aid is not Equal**: The Impact of Grants is different than Tax Credits or Loans