Good morning, Chairman Coats, Ranking Member Maloney, and distinguished Members of the Committee, and thank you for giving me the opportunity to share my views on the concept of financing higher education.
My name is Andrew Kelly and I am the director of the Center on Higher Education Reform at the American Enterprise Institute, a non-profit, non-partisan public policy research organization based here in Washington, DC. My comments today are my own and do not necessarily reflect the views of AEI.
I’m here today to discuss important concerns about our current approach to student financial aid and to identify some possible solutions, both reforms to current policy and opportunities to leverage private financing more effectively.
The federal government now hands out more than $150 billion a year in grants, loans, and tax credits—up from $93 billion just ten years earlier.[i] On a per-pupil basis, federal aid disbursements increased from just over $7,450 in 2003-04 to more than $10,900 in 2013-14 (in constant 2013 dollars).[ii] Yet net prices—what students pay after grants and scholarships—and out-of-pocket costs are at all-time highs.[iii] Though we are spending about twice as much on the Pell Grant program as we did prior to the Great Recession, the purchasing power of the grant is at an all-time low.[iv] Meanwhile, new data on loan repayment suggests that many students are borrowing too much for programs that do not pay off in the labor market.[v]
What explains these trends? Many analysts have argued that the problem is not that federal aid has failed to keep up with the price of tuition, but that federal aid itself may be one of the forces driving those increases. Grants, loans, and tax credits bring down the out-of-pocket price for students, thereby enabling them to afford more than they would have in the absence of the aid. But these programs provide colleges with little incentive to contain their costs, and may provide reason to increase them. How much a student can borrow is based on the cost of attendance, which is set by colleges themselves; the higher their prices, the more aid their students are eligible for. While undergraduate loans have annual and lifetime borrowing limits, federal loans to parents and graduate students allow for unlimited borrowing up to the cost of attendance.
Research on the causal effect of federal aid on tuition prices—popularly named the “Bennett Hypothesis” after former Secretary of Education William Bennett—has tended to produce mixed findings across sectors, aid programs, and time periods. A handful of recent, well-designed studies suggest that federal aid does lead at least some types of colleges to change their sticker and net prices. This literature suggests that different aid programs—loans versus grants, for instance—have different effects on tuition prices, and that different types of colleges will vary in their response to changes in federal aid programs.
In this testimony, I will argue that while the Bennett Hypothesis has been a useful lens in explaining why expansions in federal aid have failed to keep out-of-pocket prices low, it examines just one facet of the challenges facing federal policymakers. On the positive side, it has helped to clarify the incentives colleges face and why simply spending more is unlikely to bend the cost curve. In the extreme, it warns us that federal aid is doing the opposite of what it was designed to do: inflating prices rather than reducing them.
But the focus on price increases pays too little attention to a more pressing problem—the failure of student aid policy to promote educational quality. Put another way, tuition inflation is one important symptom of a broader problem: federal aid provides loans to high school graduates with essentially no questions asked, and allows those loan dollars to flow to any accredited college regardless of whether they provide a valuable education. Easy credit with no underwriting and imperfect information leads to a scenario where—per the Bennett Hypothesis—colleges can raise tuition prices without changing the quality of the education and still attract paying customers. Federal loans also allow students to enroll in low-value programs—those that are overpriced relative to their quality. Even if these institutions do not raise their prices in response to changes in federal aid, the availability of loans enables them to charge more for their programs than they would be able to in the absence of that aid.
Note that in both scenarios—Bennett’s “greedy colleges” that raise tuition to capture federal aid and the poor programs that are able to overcharge—public money designed to make college more affordable only serves to make it more expensive than it should be. But while solutions to the former—stricter loan limits or an elimination of the loan programs altogether—may reduce tuition prices, they may not help students navigate to the most valuable options.
In the remainder of this document, I discuss the four major design flaws in the student aid system before summarizing the evidence on the so-called Bennett Hypothesis. I then discuss what I see as a crisis of value in American higher education and conclude with a discussion of potential solutions to these problems: stricter loan limits, better data for prospective students, improved federal accountability policies, and private sector financing alternatives.
[i] College Board, “Total Student Aid and Nonfederal Loans in 2013 Dollars over Time,” Trends in Student Aid, 2014, http://ift.tt/1NDFnFe.
[ii] College Board, “Federal Aid Per Full-Time Equivalent (FTE) Student in 2013 Dollars, 1993-94 to 2013-14,” Trends in Student Aid, 2014, http://ift.tt/1Gh1uZx.
[iii] U.S. Department of Education, National Center for Education Statistics, “Out-of-Pocket Net Price for College,” April 2014, http://ift.tt/1Gh1uZz.
[iv] Congressional Budget Office, The Federal Pell Grant Program: Recent Growth and Policy Options, September 2013, http://ift.tt/1l2jChW.
[v] U.S. Department of Education, Better Information for Better College Choice & Institutional Performance, September 2015, http://ift.tt/1Olekgj.
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