The study, authored by Grey Gordon and Aaron Hedlund, used a computer model to measure the effects of various economic forces on college costs. According to the model, no factor had more to do with rising tuition prices than loan subsidies.
“Looking at individual factors, we find that expansions in borrowing limits drive 40% of the tuition jump and represent the single most important factor,” wrote the study’s authors.
In fact, the “Bennett hypothesis”—the idea, first proposed by President Ronald Reagan’s Education Secretary William Bennett, that increasing student aid encourages colleges to jack up prices—fully explains all the tuition increases between 1987 and 2010, according to the study:
Existing theories can fully explain the increase in net tuition between 1987 and 2010. Our model suggests demand-side theories have the most predictive power. In fact, our results show the Bennett hypothesis can fully account for the tuition increase on its own.
George Mason University economist Alex Tabarrok warns that the study’s findings seem a tad too favorable to the Bennett hypothesis, and notes that the authors believe their model may exaggerate the effect. Even so:
Some of these results appear too large to me and the authors caution that they need to assume a lot of monopoly power to solve their model so the results should be taken as an upper bound. Nevertheless, the Econ 101 insight that subsidies increase prices (even net for those who are not fully subsidized) holds true.
A recent study by the New York Federal Reserve reached a similar, albeit less dramatic, conclusion regarding the link between loans and tuition. In a sane world, these findings would discourage government policymakers from further subsidization of American higher education.
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