Bennett Hypothesis 2.0 (part 1)

While we saw in a previous post that the evidence for and against the Bennett Hypothesis was inconclusive at best, Andrew Gillen (writing at the time for the Center for College Affordability and Productivity) saw an opportunity to expand on this “overly simplified view” of higher education funding. Dubbed the Bennett Hypothesis 2.0, Gillen adds three refinements to the original Bennett Hypothesis that are not only supported anecdotally by those in higher education, but by past and current research on financial aid. These three refinements are:

  1. All Aid is Not Created Equal
  2. Selectivity, Tuition Caps, and Price Discrimination are Important
  3. Don’t Ignore the Dynamic Story

In his review of the original Bennett Hypothesis, Gillen describes the typical view we take on this hypothesis. Schools are capacity constrained and cannot increase the size of the student body. Government financial aid intervention increases the demand for schooling as it allows lower income students to afford school. Since schools can’t increase enrollments to account for a higher demand they will increase tuition by the amount given in financial aid. With this view we would expect to see schools raise tuition by $1 for every $1 the government increases financial aid[i].

One of the main problems with this view is that schools are not perfectly capacity constrained, meaning they can somewhat increase their student body to account for a higher demand. If we take this view, then a $1 increase in financial aid would increase tuition, but by some amount less than $1[ii].  The literature I have previously reviewed, as well as that reviewed by Gillen, supports this theory.

All Aid is Not Created Equal

Gillen explains that aid given to everyone, versus aid restricted to low income students, will have a vastly different impact on tuition increases. Let’s look at a simple example of how this would play out. If tuition is $20,000, then any student who is willing (and able) to pay this cost will attend college. But what about those who are unwilling or unable to pay? Without financial aid these students will not attend college.

But what if the government gives everyone who attends college $5,000? Well now those who were willing to pay $20,000 will be willing to pay even more, and some of those students who couldn’t afford college before are now able to afford it – even if the tuition price goes up. Depending on the college’s capacity constraints, the overall effect is that tuition will increase by some amount equal to or less than $5,000 and some lower-income students will be able to attend who couldn’t before.

But what if the government gives low-income students who attend college $5,000? Now any student who was willing to pay less than $20,000 but at least $15,000 will be able to attend at a cost of $20,000. But, students who are able to pay just below the $20,000 cutoff are willing to pay even more than $20,000. This allows schools to increase tuition, but by an amount much less than if the grant went to everyone.

What does this mean for policy? First of all, Gillen argues, this shows we should not assume that all aid programs have the same impact. The effect government financial aid will have on tuition depends on the type of aid (grants versus loans), the target audience (everyone versus low-income), and the current tuition cost at universities. It also means that by targeting low-income students specifically, we can reduce the amount tuition will increase as a result of higher financial aid.

In my next post I will explore the effects of selectivity, tuition caps, and price discrimination on tuition increases and why we cannot ignore the dynamic story of tuition under the Bennett Hypothesis 2.0.

 

[i]

Inelastic Supply in College Enrollment

[ii]

Variable Supply of College Enrollment


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