Why More Financial Aid Raises College Tuition Costs

by Ry@SpillingBuckets on February 17, 2010

Contrarian Viewpoint: Poorly targeted government student aid programs contribute to higher tuition charges. Students over time have received more money than they absolutely needed to attend schools, this money is then spent by colleges and universities increasing the costs per student.

Think about it like this: If someone else is footing a portion of your customer’s bills, you can easily find ways to spend more and raise your prices. (according to the University of Rochester 75% of students receive some form of financial aid)

Have you seen the movie Enemy at the Gates? I don’t think I can describe my feelings very well, but I get a weighty lump in my stomach every time I think of the waves of Russian Soldiers charging towards the entrenched German 6th Army. While the movie might not be the best portrayal of one the most bloody battles in the history of warfare, the sunken feeling that comes from thinking about the people surfaces from time to time.

Men rallying together to pursue a course of action that, unbeknownst to them, will lead them farther from their goal.

When I heard that 850 college students from over 55 campuses across New York rallied in Albany to voice their opinions to state legislators, I got that same feeling again.

From The University of Rochester Campus Times: The main goal of the event was to specifically address New York State Governor David Patterson’s proposed budget plan. His plan included a $50 million reduction in the Tuition Assistance Program (TAP), which included a $75 million decrease in all TAP awards and the removal of TAP for graduate students.

Here is the deal: (excerpts from the research [PDF] conducted by Andrew Gillen from the Center for College Affordability and Productivity)

Currently financial aid programs take costs per student as a given, and attempt to offset these costs
Costs, however, are not given (different school offerings cost different amounts)
It is widely acknowledged that colleges and universities are engaged in an academic arms race (example of RIT’s new spending)

Thus, when financial aid programs make more money available to schools, this money is spent and results in higher costs per student. The end result is more costly higher education, usually accompanied by higher tuition.

Government (state and federal) is essentially subsidizing the inflation of college costs.

Here is another angle:

Schools generally cannot compete with each other by demonstrating they provide a better education than others, because the outputs of school (learning and experience etc.) are not measured
Since there are no accepted measures of outputs, and its reasonable to think that high quality inputs will lead to high quality outputs, schools compete on inputs instead
Any input that is plausibly thought to affect learning and attract high quality individuals (superstar campus, world class laboratories, fancy dorms, etc.) becomes the focus of competition, and each school tries to outdo the others

Is it any wonder that when we measure schools based on inputs, which are costly, that costs continually rise?

The result is an academic arms race, and it inevitably leads to an explosion in costs.

Policy makers have designed a convoluted financial aid system that inadvertently leads to higher tuition.

Returning to the New York situation, Governor Patterson is by no means cutting aid in an effort to wean New York off of government handouts and promote a more self reliant arms-race-free sustainable future, he is doing it because New York’s broke.

We have it backwards, federal student aid is more of a cause than a consequence of rising tuition costs.

What is the solution?
I agree with the author’s conclusion that the way to stop the arms race is to only provide well targeted means tested financial aid to low-income students, allowing them to pay current costs at their school only. When aid is made available to students who can, painfully as it may be, already pay the current costs, the schools are likely to capture the aid money and spend it. Current federally backed loan income limits are too high.

What is your view?

An arms race has also been brewing in the college textbook market. Read our guide on how to avoid it.
Another way to save money may be to gain specialized training online. Tuition is cheaper when you study through online schools. Take a look at the link that pokes fun at the topic and hosts a collection of infographics.