William Bennett was on to something 35 years ago when he asserted a link between federal subsidies and increased college costs. But there’s more to the story.
William Bennett was on to something 35 years ago when he asserted a link between federal subsidies and increased college costs. But there’s more to the story.
T hirty-five years ago this month, William Bennett, Ronald Reagan’s secretary of education, offered a theory of college-tuition inflation that would come to bear his name. The Bennett Hypothesis posits that a main reason for tuition inflation is the very set of student-loan and grant programs that the federal government created to make college more affordable.
But there was a nuance to Bennett’s theory that too often gets lost upon repetition. Bennett did not write that federal student aid is the single underlying cause of tuition inflation; rather, he argued that federal aid is a lubricant that amplifies more fundamental forces driving tuition hikes. As Bennett wrote, “Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.”
Over the past three decades, published tuition prices at four-year universities have more than doubled — and scholarships offered by schools have not kept up. Meanwhile, annual federal student-loan volume has ballooned from less than $20 billion in the 1986–87 academic year, when Bennett offered his hypothesis, to nearly $100 billion in 2019–20.
More than a dozen academic studies have identified a link between government aid and college-tuition inflation. The most famous is a 2019 paper that found colleges capture between 20 and 60 cents of every additional dollar of federal loan aid by raising their tuition prices. There is also evidence that federal grants and loan subsidies lead colleges to pare back institutional scholarships.
But why do colleges have the market power to capture a significant share of federal subsidies, rather than passing them on to students as intended? After all, the federal government subsidizes purchases of food through the SNAP program, yet food prices, unlike tuition prices, have risen in line with overall inflation over the past few decades.
One finding in the academic literature sheds light on the solution to this puzzle. Studies show that more selective colleges capture a much greater share of the aid that taxpayers furnish. Lesley Turner of Vanderbilt University found that the most selective private schools capture 93 cents of every Pell Grant dollar through tuition hikes and scholarship cuts, while schools that accept all or most of their applicants capture just 8 cents on the dollar.
Selective colleges’ extraordinary pricing power is down to the fact that they artificially limit the number of places available to students. As demand for a college education rises, supply must expand with it, or else price inflation will be the inevitable result. Federal subsidies exacerbate the problem, but we need to look deeper for the fundamental cause.
Where we observe unchecked tuition inflation, the likely culprits are institutions and policies that constrain the educational choices available to students. Highly “rejective” admissions policies at elite universities are an example. But others abound.
Accrediting agencies, which must approve new colleges and universities seeking access to federal subsidies, are stacked with representatives of incumbent institutions who are loath to approve new competitors. In addition to accreditation, new schools need authorization from a state agency to open, and obtaining it can take a year or more. As a result of these barriers to entry, the number of private nonprofit colleges in the U.S. is roughly the same today as it was in 1987.
Colleges’ pricing structures also have a deleterious effect on competition. Most students do not pay the full yearly “sticker price” of college, which can reach $70,000 or more. But students usually don’t know how much financial aid they will receive until their various applications are accepted or rejected — at which point their options are in many cases limited to just one or two schools. High-school seniors in this position have little power to bargain for a better price with the schools that have accepted them, which are delighted to push federal loans onto students to cover the cost.
Finally, the government’s loan and grant schemes heavily favor traditional colleges and universities. The scales are tipped against alternatives such as apprenticeships, workforce training, and the pursuit of industry-recognized credentials. Meanwhile, employers require bachelor’s degrees for jobs that didn’t need one 30 years ago, funneling ever more students through traditional four-year colleges. With few recognized alternatives to the almighty bachelor’s degree, colleges feel little competitive pressure, and their prices reflect that.
No one can deny that federal student-aid programs require major reforms, starting with caps on loans at commonsense levels. But policymakers cannot ignore the deeper drivers of tuition inflation — barriers to entry, opaque pricing, and a dearth of good alternatives to the four-year college — that federal student-aid only exacerbates. To borrow Secretary Bennett’s own words: Our students deserve better than this.