Bennett Hypothesis 2.0 (part 2)

In my last post I explored Andrew Gillen’s first expansion to the Bennett Hypothesis that not all aid is created equal. In this post I will explore his next two refinements – that selectivity, tuition caps, and price discrimination are important and that we cannot ignore the dynamic story surrounding tuition.

Selectivity, Tuition Caps, and Price Discrimination are Important

Gillen argues that tuition caps and price discrimination both weaken the link between aid and tuition by introducing an uncovered topic in the original Bennett hypothesis – selectivity.  Tuition caps impose selectivity by preventing schools from raising tuition unchecked when government aid is given. Suppose a resource constrained school normally sets tuition costs at $20,000. If federal aid is given to every student in the amount of $5,000, tuition costs can now be raised to $25,000 and the number of students who are willing to pay will get in. But what happens if the state government puts a cap of $23,000 on tuition? Because of the federal aid, more students are willing to pay $23,000 to attend the school than can get in.[i] This imbalance allows schools to select only the most qualified candidates, thus increasing their selectivity. As Gillen points out though, many schools do not charge the highest possible tuition, meaning that under current circumstances, schools seem to value selectivity over revenue.

In many instances schools, especially private universities, selectivity charge students different amounts for tuition. These schools set a high base tuition and then, through scholarships and grants, lower the actual price paid for individual students. Imagine a school with a tuition of $30,000 that is trying to decide between two students: Student A who is low ability but willing to pay the full $30,000 tuition, and Student B who is high ability but only willing and able to pay $10,000. Who will this school choose? This is going to depend largely on the school climate. If the school wants to maximize revenue they will likely choose the low ability student, netting the full $30,000 tuition. If a school wants to maximize prestige they may offer the high achieving, poorer student $20,000 in aid to attend (i.e., losing $20,000 in revenue).

Don’t Ignore the Dynamic Story

Gillen argues that we can’t think of education funding as a static image. Previously I have written about Bowen’s Rule, and this rule comes into play when looking at the dynamic picture of school funding. In short, because schools want to achieve excellence and all the money they receive will go to this pursuit, schools will raise and spend all the money they can which leads to constantly increasing costs.

To illustrate the effect of Bowen’s Rule, let’s assume we have two schools. School A can only accept a set number of students and therefore will only increase tuition. School B, on the other hand, has the capacity to add more students, and therefore will only increase enrollment. What happens when grant aid is given to students in both schools? School A will raise tuition by the aid amount[ii] while School B will increase its attendance to offset the increased revenue[iii].

But what does School A do with its increased revenue (from raising tuition)? As Bowen’s Rule says, it spends all of it to improve the school. These improvements could be new facilities, better professors, or new student programs, but – regardless of what School A buys – it will raise future costs. Buildings require maintenance, tenured faculty are hard to fire, and new programs require operating funding.

Furthermore, as I’ve explored in a previous post, colleges must also compete for prestige. If School A improves its campus, School B must find a way to compete. School B must build new facilities to entice students to come, it must raise pay to keep professors from leaving, and it must provide added programs to keep up. Even though School B isn’t raising tuition this year, it might need to next year to compete. Thus, even when schools try to survive with lower tuition, they may still need to increase tuition yearly to compete with other institutions.

How Do We Escape the Bennett Hypothesis 2.0?

Gillen’s short answer is that we can’t. He argues that the way we’ve set up competition in higher education drives the Bennett Hypothesis 2.0. Since colleges compete on relative standings, and not quality, no one school can look better without another looking worse. To escape, we must make schools pursue value over prestige, and the only way to do this is with better data. Getting comparable true cost of attendance and outcomes data for colleges is notoriously difficult.

While it can be difficult to obtain this data – largely due to price discrimination and incomplete survey data – there are other data we can use to determine a schools value. Making data around graduation rates, graduate school placement, debt ratios, and other data more accessible would go a long way in helping promote value over prestige and stopping the vicious cycle of the Bennett Hypothesis 2.0.

As I wrap up my series on rising tuition, I would love to hear your feedback, questions, or theories as to why tuition is increasing. Feel free to comment on this post or tweet me @Josh_RRussell. In case you've missed any posts in this series:
Bennett Hypothesis: Does Student Aid Raise Tuition?
Alternative Theories for Rising College Tuition: State Funding and Competition
Alternative Theories for Rising College Tuition: Baumol’s Cost Disease and Bowen’s Rule
Bennett Hypothesis 2.0 (part 1)
Bennett Hypothesis 2.0 (part 2)

Tuition Caps in Bennett Hypothesis 2.0
Dynamic Story of Tuition in Bennett Hypothesis 2.0

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