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Does financial aid cause tuition increases?

REPUBLICANS IN the House of Representatives have lately been asking a question that makes the higher education establishment very nervous: Does federal financial aid simply give colleges an excuse to raise tuition higher and faster than they otherwise would?

When then-Secretary of Education William J. Bennett made the argument 16 years ago in a New York Times op-ed titled "Our Greedy Colleges," most higher-education economists rejected it as simplistic and ideologically convenient. But the thesis is getting a new hearing in these times of endlessly skyrocketing tuition and government budget deficits. According to a report by the College Board issued last month, tuition at private colleges is up six percent (to an average of $19,700) this year, while in-state tuition at four-year public colleges jumped 14 percent, to $4,700.

The federal government will provide about $65 billion in grants and loans to students this year, but there is unlikely to be much more additional money in coming years. Whether from necessity or principle, some Republicans now argue that holding the line on aid might be just the ticket to keep college costs down. (Last month, Republican lawmakers introduced a bill that would withhold federal grants from colleges that raised tuition at more than twice the rate of inflation.)

Colleges, however, say a failure to increase federal financial aid would hurt poor students. And most economists who study tuition seem skeptical of the idea that aid has gone from being part of the solution to part of the problem. "I don't think the evidence that that has occurred is particularly strong," says Ronald G. Ehrenberg, director of the Cornell Higher Education Research Institute.

The first argument against "the Bennett hypothesis" is the relatively small size of the aid packages. Low-income students, for instance, qualify for Pell Grants that max out at $4,050 a year -- and, of course, only a minority of American students receive those awards. Even at a community college, Pell Grant money only accounts for about 15 percent of revenue, according to Carolyn Hoxby, a professor of economics at Harvard. At expensive elite colleges, the proportion of income from this source is minuscule.

A similar logic holds for loans, says Sandy Baum, an economist at Skidmore. The US Department of Education offers highly subsidized loans to poor students, along with moderately subsidized loans to middle-class students. The maximum loan in both cases is $2,625 for freshman, with the cap rising to $5,500 by senior year. "If all you can get as a freshman is a $2,625 loan, and the cost of attendance is $30,000, that's not being driven by the loan," she says.

In theory, students should still be driven to price-shop for colleges, since they're responsible for all costs above the grant and loan limits. That shopping may put downward pressure on tuition, though clearly the upward pressure from rising faculty salaries is winning.

The story may be different at extremely low-cost colleges. A study by Bridget Terry Long, of the Harvard Graduate School of Education, made headlines last month because it found that President Clinton's higher-education tax credits had not, as planned, led to increased rates of college attendance but instead had mainly given a financial boost to students who would matriculated anyway.

Less noted was her finding that the credits inspired tuition increases at the low end of the price scale. Because the credits cover the first $2,000 in each of the first two years of college, the few colleges that charged less than $2,000 -- mostly community colleges in the South and West -- raised their fees accordingly, Long found.

The loudest contrarian voice in this debate has been F. King Alexander, president of Murray State University in Western Kentucky. Alexander, also an economist, thinks federal policy discriminates against institutions like his that have labored to keep costs low. (Murray State costs about $3,400 a year for in-state students.) A poor high-school senior who chose, say, Duke (tuition: $29,350) over Murray State,

Alexander points out, would get several thousand dollars more in federal grants and loans simply because Duke charges more.Alexander, however, doesn't think that expensive public or private colleges are the worst offenders when it comes to manipulating prices to lure federal green. That honor belongs to the for-profit schools such as the University of Phoenix (tuition: $1,140 per five-week course) which "literally set their tuition based on how much aid they can acquire," he argues. That's their business plan: Their executives skim profits off the Federal Treasury.

Ironically, those are the institutions that Republicans point to as exemplars when they chide nonprofit colleges for being inefficient. "The biggest fallacy in American higher education is that for-profit universities live and die by the marketplace," Alexander says. "They don't. They live and die by federal direct student aid and state grants."

Christopher Shea's column appears in Ideas biweekly. E-mail:

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