Follow the Facts to a Financial Aid Solution

College tuition has increased over the past few decades at a rate that has outpaced inflation, putting college out of reach for many students. Ironically, the financial aid designed to mitigate this problem may actually have the opposite effect.

The cost of higher education has grown faster than inflation for decades. Travis Mitchell of U.S. News & World Report found that between 1995 and 2016, average tuition and fees at national universities rose 179 percent, while in-state tuition and fees rose almost 300 percent. During the same period, the Consumer Price Index (which tracks inflation) rose only about 55 percent. There are many explanations for this sharp increase in the cost of higher education. Per-student state contributions to public universities have declined. To attract students, schools have spent heavily on construction to improve facilities. They have also increased administrative staffs, in part to provide additional student services.

Another theory to explain why college costs have grown so much points to increased public financial aid as the cause. Richard Vedder of the American Enterprise Institute makes this argument—originally put forward by Bill Bennett—in The Wall Street Journal. Vedder notes that higher education costs rose only about 1 percent annually between 1840 and 1978. However, after the federal financial aid program expanded in 1978, costs have risen about 3 percent annually. While financial aid programs now total $158 billion annually—a 10-fold increase since 1970 adjusting for inflation—Vedder observes that the ”proportion of recent college graduates from the bottom quartile of the income distribution has fallen significantly since 1970, to 10 percent from over 12 percent. … On balance, federal assistance has not helped poor Americans gain access to college.” Summarizing the research on the relationship between financial aid and the cost of college, Andrew Kelly ofForbes noted, “It is difficult to identify whether aid causes tuition increases, but it certainly seems to relax the incentive to keep tuition low.”

It should come as no surprise that there were compelling reasons in the late 1970s to increase financial aid, as noted by Lawrence E. Gladieux, then-executive director for policy analysis for the College Board. Gladieux wrote that in 1978, “under pressure for some kind of response to the perceived middle-income squeeze in financing college costs, Congress passed the Middle Income Student Assistance Act.” During the following year, as interest rates spiked, “Congress passed a little-noticed amendment assuring banks a favorable rate of return on guaranteed student loans…The problem of lender participation and capital shortage in the loan program became a thing of the past.”

While college costs and aid have increased, the percentage of high school graduates enrolling in college has actually declined over the past few years, falling from 69 to 66 percent, according to Alia Wong in The Atlantic. One reason for this decline could be the rising cost of college; another could be an improved job market following the Great Recession. Given the low financial return on investment for many college degrees, it is also possible high school graduates are choosing to pursue careers that pay well but do not require a college degree. While enrollment declines, the Pew Research Center reported in 2014 that, “On virtually every measure of economic well-being and career attainment—from personal earnings to job satisfaction to the share employed full time—young college graduates are outperforming their peers with less education. And when today’s young adults are compared with previous generations, the disparity in economic outcomes between college graduates and those with a high school diploma or less formal schooling has never been greater in the modern era.”

Getting a college degree remains critically important for most young people, the cost to do so continues to climb out of reach, and one solution—increasing financial aid—could actually make matters worse. So, what should we do to make college affordable for more students? Though he was writing about the difficulty of explaining enrollment declines, Terry Hartle’s observation about that question applies here too: “This information cries for more analysis.”

In deciding whether to reduce or increase public financial aid to make college affordable, we need to answer a number of additional questions. How did students pay for college before 1978? Would private lenders now provide financing for student loans without public support? Can we revise financial aid programs to give colleges an incentive to keep tuition low? Are there more efficient ways to support college students, like having private companies subsidize students who complete specific degrees? If the government spent less supporting higher education, would more people have the disposable income to afford higher education that may also cost less without public support? Should federal and state governments subsidize higher education at all? Or, stated differently, should American taxpayers be asked to reduce their disposable incomes to subsidize higher education because doing so is in their long-term best interest? We need to answer these, and many other, questions with the best available evidence before deciding whether to increase or decrease financial aid.

Unfortunately, those charged with improving public policy too often do so by relying on ideological shortcuts rather than going where the facts lead. Conservatives will likely propose cuts to financial aid, because they favor private sector solutions and fewer government programs and regulations. Liberals will likely propose increases, because they favor government programs and regulations to address the acts or omissions of free market actors or forces. In my experience, conservatives adopt an ahistorical perspective by ignoring why government has extended its reach over time to solve problems the market would not address, while liberals adopt an overly optimistic view of government programs and regulations while underestimating the remarkable ability of private actors and markets to allocate resources efficiently to increase social welfare.

I submit that the question of whether and how to change public financial aid is not a question where ideological shortcuts help. Policymakers need to gather the best available information, analyze it without seeking merely to confirm their existing hypotheses or beliefs, and go where the facts and analysis lead.

This article was published in Loudoun Now on March 3, 2017.