Amidst concerns about college affordability, and suggestions that increases in student aid may help to fuel college price increases, numerous congressional requesters have asked for a product that examines what is actually known about the relationship between student aid and college prices. This report has been undertaken in response to those requests. The report approaches this topic by examining trends in college prices and student aid, examining explanations for why college prices are increasing, and then focusing on one particular explanation—the notion that increases in student aid may lead to increases in the prices charged by colleges and universities. The layout of the report is as follows. The first section provides an introduction to concepts related to college costs and prices. The next section presents data on the extent to which prices have increased at colleges and universities in the past decade, considering multiple measures of price, and comparing those increases to rates of inflation. This is followed by an examination of trends in student aid. The next section of the report presents an overview of many possible explanations for price increases. After the overview of these competing explanations, one explanation is focused on—the possibility that increases in student aid may lead to college price increases. This is examined through a review of primary studies undertaken in the last decade that attempt to isolate the effects of increases in student aid on prices. Few domestic social policy issues have received as much attention in recent years as rising college prices. Scarcely a month goes by without a major publication raising concerns about the sustainability of price increases or about potential consequences that may result from the debt being assumed by students to pay for college. College affordability in light of increasing prices has been the focus of many legislative proposals, congressional hearings, and recent presidential initiatives. Ensuring access to affordable higher education is a priority for many federal policy makers. In part this stems from a desire to ensure the economic wellbeing of individuals, but beyond the benefits that education provides to individuals, education is valued for its contributions to the vitality of the labor force overall, and as such, is often viewed as an important component of economic policy. In addition to having an interest in college affordability for the aforementioned reasons, federal policy makers tend to be attentive to the issue as stewards of a large investment in programs designed to promote postsecondary attendance. The federal government plays the primary role in supporting direct aid to postsecondary students, supporting roughly $170 billion, or 71% of such aid, in the most recent academic year for which data are available. Given that federal policy makers oversee a large investment in this area, they have a natural interest in understanding the efficacy of the federal aid programs that collectively aim to promote postsecondary access, attainment, and affordability. The efficacy of the federal financial aid effort has been called into question by some lately as suggestions have surfaced that federal aid may be helping to fuel college prices. In considering some of these issues, a starting place is examining changes in college prices. The first challenge with regard to examining college pricing, however, is determining the appropriate measure of price to track. In considering how much it costs for students to attend college, it is important to understand the difference between college costs from the institution's perspective and prices for the student. In literature on college costs and prices the term cost generally refers to what institutions spend to provide education and educational-related services to students. College costs are supported through a mix of government appropriations, endowment revenue, payments from students, and in some instances through other revenue sources. An important consideration when examining college costs and prices is that only a portion of college costs are covered through student payments, the remainder is thought of as a subsidy. College prices commonly refer to what students or families are asked to pay for higher education. The primary focus of this report is changes in college prices—although college costs are discussed frequently, particularly in relation to the role they may play in affecting how colleges determine prices. Colleges publish prices known as list prices delineating the applicable charges to students paying full price for items such as tuition and fees, and room and board. While colleges post list prices they also engage in fairly extensive discounting of those prices on the basis of factors such as students' financial need or merit. Because colleges publish a list price, but in actuality do not ask all students to pay a common price, and because many governmental subsidies are available to help defray the actual price that students pay, a variety of terms are used to distinguish between published prices and the prices that are actually paid by students net of certain types of subsidies and discounts. Perhaps the most commonly used term to depict actual prices students are paying is net price , which generally refers to the amount a student pays net of grant and scholarship aid. When considering affordability from the perspective of the student, for instance, many would argue that it is more helpful to track changes in net price as opposed to the published price. A complication, however, is that annual data on list prices are readily available, while comprehensive historical data on net price are not, making it harder to systematically track net price trends. Prices can also be examined from the perspective of the institution. If, for instance, the actual prices institutions set for students are the focal point of an examination, measures of the effective price being charged after institutional discounting is accounted for may be reported. A commonly reported figure depicting this is net tuition rev enue , which reflects the average tuition revenue per full time equivalent (FTE) student received by institutions after institutional discounts are subtracted. Adding to the complexity of the topic, when college prices are discussed, still other distinctions are commonly made. For example, another distinction can be made between the price charged for only tuition and required fees and the other components that make up a student's total cost of attendance . A student's total cost of attendance may include charges for tuition and fees, and also charges for other components such as room and board, transportation expenses, books, supplies, and other expenses. It is often viewed as important when presenting trends for prospective students to display the price associated with the total cost of attendance for academic years, in addition to the price associated exclusively with tuition and fees. Moreover, eligibility for federal student aid programs is typically determined based, in part, on a student's total cost of attendance. Therefore, any measure of college price could include other expenses associated with the student's cost of attendance during the year. Measures of net price are usually based upon the students' full cost of attendance, whereas measures of net tuition are usually based upon the charges associated with tuition and fees. Figure 1 depicts net price for students and net tuition revenue per FTE student for institutions of higher education (IHEs), which in addition to list price tend to be commonly reported measures of price. This report primarily focuses on four-year public and private nonprofit institutions of higher education. Together they serve roughly half of the student population enrolled in degree-granting institutions. The decision to focus on these institutions is a pragmatic one. Much of the report examines research and literature seeking to explain college price increases, and that work typically concentrates on this set of institutions. Price increases at this set of institutions also tend to be the focus of much of the affordability debate. Four-year public and private nonprofit institutions typically receive a lot of the attention in the policy discourse on college price increases. While there are substantial variations within each of these institutional sectors in the roles different institutions play and in the ways prices are established, some fundamental differences exist across the sectors that bear highlighting. Public colleges and universities are state subsidized institutions that have historically aimed to provide affordable higher education options for state residents in particular. State tuition levels are established by legislatures, statewide coordinating/governing agencies, and/or by coordinating/governing boards for individual state systems. Although certain entities have primary tuition-setting authority in many states, tuition setting processes are described as consultative multi-step processes including input from the governor, legislature, colleges, and coordinating/governing boards. While many factors are taken into consideration when setting tuition levels, the share of the expense associated with providing education that is to be assumed by the students versus the broader base of taxpayers is often a central consideration in these deliberations. Where private nonprofit colleges and universities are concerned, tuition revenue typically plays the primary role in covering costs. As such prices are heavily relied upon to ensure revenues are sufficient to cover educational expenses. Private institutions are reported to typically consider a variety of factors such as revenue needs and prices at peer institutions when setting list prices, and as needed they use "tuition discounting" as a strategy to help make sure they meet enrollment and revenue needs. Tuition discounting has been characterized as the "art and science of establishing the net price of attendance for students at amounts that will maximize tuition revenue while achieving certain enrollment goals." In effect, through discounting private colleges and universities employ a pricing practice that economists call "price discrimination," which means charging different consumers a different price for the same product. Prices are set on the basis of the consumers' ability or willingness to pay more for a product, or based on factors such as how valued a certain type of customer or business is. Tuition discounting at private nonprofit colleges and universities is a long-standing and prevalent practice. These price discounts can be used to fill seats that would otherwise go unoccupied, to enhance the academic profile of an institution, to make it possible for lower income students to attend an institution, or to compete for financially desirable students who may be weighing other options. Roughly three out of five students at private nonprofit four-year colleges and universities receive a discount. From an institutional perspective, this can be examined in terms of "discount rates." Discount rates are a measure of the institution-wide percentage reduction in tuition revenue stemming from the award of institutional grant aid. At private nonprofit four year institutions discount rates range from 27% to 36%, depending on the type of institution. At public institutions, list prices are more indicative of the effective prices colleges and universities are asking students to pay.