Gary Wolfram, Cato Institute
January 25, 2005
This short piece in Cato's Policy Analysis series explores the "Bennett hypothesis," the former education secretary's argument that federal student aid programs drive up college tuitions and thus do less good for students and their families than intended. Such programs cost $68.8 billion in 2004 (and Bush has asked for $73 billion in the FY2006 budget), so it's important to understand the effects of these programs. Wolfram first takes readers back to economics 101 to get reacquainted with the theory that such subsidies shift the demand curve and thus shift the equilibrium quantity and price - in his example, to a point where more students attend college but face higher tuitions. The actual slopes of the supply and demand curves (elasticity) determine whether, in real life, enrollments actually increase (a school may prefer to remain selective) and how much tuitions rise. On that point, Wolfram reviews empirical studies of the relationship between federal aid and tuition and finds convincing evidence of a connection. The effect varies in size - in some cases tuition rose by more than the aid amounts, in others less - but nonetheless exists. The net effect is that federal student aid probably does as much to enrich our colleges (and hold down state aid to students) as it does to ease tuition burdens. The problem is exacerbated by the rising level of aid available to wealthier families today (see here) and complicated by the continued layering of new federal programs on top of old. What's the solution? Wolfram would gradually abolish all federal student aid, in the hope that both private aid and the market system would compensate. (Remember, this is a Cato publication.) Toward the latter, he offers Milton Friedman's argument for "human capital contracts," by which investors might provide tuition aid in return for a portion of the student's future earnings. Of course, such a system might encourage students to major in the most employable subjects in order to be attractive to investors (which Wolfram briefly acknowledges) and would effectively make financial aid more merit-based than need-based (a point not mentioned, though presumably he hopes charity will fill this gap). Besides which, the idea is a political pipe dream. (Though cash-strapped students might note that such a service apparently exists; see www.myrichuncle.com.) Overall, this paper has some interesting arguments and analyses but no practical fix for escalating college costs. It's available online by clicking here.
