	About This Report

Amidst concerns about college affordability, and suggestions that increases in student aid may help to fuel college price increases, numerous congressional requesters have asked for a product that examines what is actually known about the relationship between student aid and college prices. The report approaches this topic by examining trends in college prices and student aid, examining explanations for why college prices are increasing, and then focusing on one particular explanation—the notion that increases in student aid may lead to increases in the prices charged by colleges and universities. This is followed by an examination of trends in student aid. This is examined through a review of primary studies undertaken in the last decade that attempt to isolate the effects of increases in student aid on prices. While colleges post list prices they also engage in fairly extensive discounting of those prices on the basis of factors such as students' financial need or merit. Because colleges publish a list price, but in actuality do not ask all students to pay a common price, and because many governmental subsidies are available to help defray the actual price that students pay, a variety of terms are used to distinguish between published prices and the prices that are actually paid by students net of certain types of subsidies and discounts. A complication, however, is that annual data on list prices are readily available, while comprehensive historical data on net price are not, making it harder to systematically track net price trends. Price increases at this set of institutions also tend to be the focus of much of the affordability debate. After adjusting for inflation, the annual changes in average aid per FTE student for the types of aid examined were more volatile (sometimes escalating by large increments and sometimes declining from year to year) than were the changes in prices under any of the measures of price presented in this report. When the state contribution per student has declined (or failed to keep pace with growth in enrollment), the institutions generally have relied more heavily on tuition revenues. Often these questions arise when concerns about college prices have received a good deal of attention. Considering Student Aid as a Possible Explanation for College Price Increases

As noted in the introduction of this report, it has been undertaken in response to a series of questions from congressional offices about the effects of student aid on college prices. These questions have come in different forms, and have been raised with increasing frequency in recent years. This question arises because it is understood that colleges establish different prices for different students and out of concern that colleges may enjoy pricing power (i.e., the ability to raise prices without destabilizing demand). As this report moves into a review of studies examining the effects of aid increases on prices, it will initially discuss their alignment with the policy questions CRS receives, in terms of the types of aid they study, and the extent to which studies focus on prices for individuals targeted by the aid versus the broad effect on prices. The relationship between prices and loans or tax assistance—the types of aid that are most widely available and that are available to students and families across higher income categories—is not the focus of much of this research. There are a limited number of studies that attempt to study the Bennett Hypothesis, or more generally the relationship between financial aid and some measure of "price," and provide evidence that increases in federal financial aid lead to increases in college prices. In fact, the studies vary across many dimensions, including the main research questions explored, theorized mechanisms of causation (i.e., how they theorize aid would be captured by institutions), the analytical/methodological approaches employed to examine causality (e.g., natural or quasi experimental versus regression based approaches), selection and use of data, construction and use of proxy measures for aid and price, model specification, and universe of colleges and universities studied. There is also not consistency in findings for either public or private colleges across the studies. Limitations of Findings

Across the studies, findings are limited by challenges associated with measuring change in price as well as by challenges associated with isolating the effects of student aid on prices. Measuring Change in Price

Not having the outcome measure of primary interest available—a good measure of net or effective price—is ultimately a substantial limiting factor in understanding the relationship between aid and price. This precludes analyses that would be responsive to many prevalent policy questions, particularly those pertaining to the extent to which aid aiming to lower net price did so for targeted students or was captured by the institution, as well as those seeking a more thorough understanding of what an institutional price response might look like across students. Moreover, a challenge stemming from the lack of actual, all inclusive, composite measures of average net or effective price at an institution is that it leads to researchers examining the effects of student aid on the component parts of net price (e.g., institutional grants, list price for tuition—for in state and out of state students) in separate models, theorizing that upward change in list price accompanied by no change or downward change in institutional grant aid can be used to confirm an institution has responded to an aid increase by capturing aid. This raises the fundamental question of whether, across the studies, the outcome variables actually measure change in the outcome of interest. There is little to no consistency about the mix of covariates across studies. In fact, there are often contradictory findings within a single study and there is certainly no consensus on the existence, and certainly not the magnitude, of causal relationship between aid and price. In particular, the effect on price of student loans and tax credits, the forms of federal aid that are most widely available and that are available to students and families from middle and higher income levels, is not the focus of much research.
College affordability is an issue that has received considerable attention from federal policy makers in recent years as concerns have arisen that a college education may be out of reach for an increasing number of students and families. While there is little disagreement that escalating college prices pose a problem, there is not a consensus about the precise causes for these increases.
Among the possible explanations for price increases, one that has surfaced with some frequency in recent years is the notion that the availability of or increases in federal student aid may help to fuel price increases, as institutions seek to capture additional aid rather than stabilize or lower prices. This hypothesized relationship has received a good deal of attention and raised some concerns about the efficacy of federal student aid policies that aim to enhance access and affordability.
This report has been undertaken in response to numerous congressional requests to explain what is actually known about the relationship between student aid and prices. In this report, this task is approached first through analysis of trends in prices, examining different measures and concepts of price. This is followed by a brief examination of trends in student aid, and an examination of many of the competing explanations for why prices are increasing. Finally, the report explores what is known about the possible causal relationship between student aid and price increases, principally through a survey of primary studies that attempt to isolate the effects of student aid on college prices. Some of the themes highlighted in the report are as follows:
While colleges publish list prices, they also engage in fairly extensive price discounting, effectively reducing prices. Additionally, other subsidies such as governmental grants further defray the price students are asked to pay. Trends in college prices can be measured in terms of published prices, effective prices (prices net of institutional discounts), or net prices (prices net of governmental grant aid and institutional discounts). By any measure, in more recent years for which more comprehensive data are available, prices consistently increased at rates exceeding inflation. Overall, student aid per full time equivalent student has also increased in recent years although the trends in aid exhibit more volatility across years (than do the trends in price), sometimes escalating by large increments and sometimes declining or eroding from year to year. A plethora of potential explanations for escalating college prices exist. These include declining state appropriations on a per student basis and fluctuating endowments, which may lead to greater college reliance on tuition revenue from students. Similarly, the escalating cost of items upon which colleges are highly reliant, such as high-skill labor and technology, are identified as factors that increase the cost of providing education and potentially contribute to higher prices. Other explanations suggest that colleges have multiple institutional missions, have ineffective centralized control of costs, suffer from various types of productivity issues, and have institutional orientations and incentives targeted toward raising and spending considerable amounts to enhance students' experiences as opposed to orientations toward using resources efficiently. In addition, it is often suggested that durable, or relatively inelastic, demand for postsecondary education may endow colleges as credentialing institutions with considerable pricing power (i.e., the ability to raise prices without destabilizing demand). There are a substantial number of seemingly plausible explanations for why prices are increasing. This makes it challenging to isolate the effects of any single factor. Through CRS's review of research nine empirical studies have been identified, which over the last decade or so have attempted to isolate the effects of changes in aid on prices. Collectively, the studies focus on price responses associated with several different types of student aid, but the effects of grant aid on prices is the most heavily studied relationship. The relationship between prices and loans or tax assistance—the types of student aid that are most widely available and are available to students and families across higher income categories—is not the focus of much of this research. Concerns that colleges may "capture" some portion of the aid that is provided to students to lower their net price are generally not directly addressed in the studies. The studies are primarily focused on broad institutional price responses. That is, they do not typically address effects on prices for subgroups of students within institutions, and distinctions are not made between those students who are and are not receiving the student aid hypothesized to be affecting prices. Hence, questions about the extent to which aid policies aiming to lower the net price for targeted students actually do so are generally not directly addressed. The studies vary across many dimensions, including the main research questions explored, theorized mechanisms of causation (i.e., how they theorize aid would be captured by institutions), the analytical/methodological approaches employed to examine causality (e.g., natural or quasi experimental versus regression based approaches), selection and use of data, construction and use of proxy measures for aid and price, model specification, and universe of colleges and universities studied. This expansive set of differences makes it especially hard to compare and contrast the studies. There is not a high degree of consensus in the findings generated across the studies. Findings across studies are not consistent in terms of direction and magnitude of effects, and even within studies, changes in model specification or controls lead to vastly different results, often without strong rationales for the superiority of specifications generating more robust findings. Beyond the various differences in these studies and methodological challenges encountered across this research agenda, not having the outcome measure of primary interest available—a good measure of net price—is ultimately a substantial limiting factor in understanding the relationship between aid and price. Rather, the studies rely heavily on measuring change in list price or change in proxies for net price. This raises the fundamental question of whether, across the studies, the outcome variables actually measure change in the outcome of interest and suggests the need to develop more precise data on net price at institutions to further the understanding of the relationship between federal aid and college prices.