Student debt in the United States is increasing faster than the inflation rate. The Student debt is about $1 trillion this year.
Various federal aid programs from the Pell Grant to student loans tried to combat the costs by increasing the amount of aid offered. However, some studies suggest that federal aid may be unintentionally causing tuition to increase.
The Bennett hypothesis, which was first introduced by former Secretary of Education William Bennett 26 years ago, states that if federal aid is higher than tuition, colleges will raise their costs in order to capture that money.
A 2004 study by University of Rochester’s Michael Rizzo and Cornell’s Ronald Ehrenberg found that increases of in-state tuition were linked to increases in the amounts awarded by the Pell Grant and federal subsidized and unsubsidized loans.
In July, The U.S. Department of Education reported that tuition at four-year state colleges increased faster for in-state students than for students out-of-state.
To deal with rising college costs, students get more loans and grants from the federal government.
Michael Walden, an economics professor at N.C. State, explained why that aid may indirectly increase college tuition.
“Obviously, more financial aid at any point in time would help students,” Walden said. “But some economists argue the consistent increase in government aid to students has made students less ‘price sensitive’ and has contributed to greater tuition increases, especially if capacity at colleges doesn’t keep up with the number of students desiring to attend college.”
American college graduates are earning more than graduates from other countries, which people find college an attractive option.
Walter Wessels, from the Department of Economics at N.C. State, described how demand for education affects the price.
“When you see prices go up, it’s usually due to shifts in demand curve. If cost increased, fewer people would go to school. If demand increased, cost would go up and more people would go to school,” Wessels said.
Demand for education, fueled by availability of grants, loans and the value of college education, is one likely contributor to rising college tuition.
The Bennett hypothesis offers another theory explaining why college tuition keeps rising more than double than the inflation rate.
A study published in 2012 by Lesley Turner from the economics department at Columbia University found colleges capture about 16 percent of Pell Grant money, meaning Pell Grant recipients are charged more through price discrimination.
Research conducted in 2002 by a Harvard economist Bridget Long found that a scholarship in Georgia increased tuition regardless of school type but private schools increased tuition more than public counterparts.
Currently, there aren’t many solutions on how to tackle the problem of student demand, financial aid and increasing college costs.
“Some say the ‘wave of the future’ will be more on-line and distance-learning opportunities, that these will moderate college costs because fewer expensive classrooms will need to be built, and possibly fewer faculty will be needed,” Walden said. “Of course, others say on-line and distance-learning are not perfect substitutes for classroom teaching.”
However, despite rising tuition costs, college pays off in the end. According to a report by the Wall Street Journal, N.C. State graduates have a median starting salary of $47,200 and a mid-career salary of $83,300 a year.
“College still ‘pays off’ for students finishing,” Walden said. “I estimate that last year’s NCSU graduating class will earn almost $2 billion more in lifetime income, [expressed as a single ‘investment value’ in today’s dollars] compared to what they would have earned if they stopped their education at high school.”
