How College Pricing Undermines Financial Aid

Center for College Affordability and Productivity. 1055 Thomas Jefferson Street NW Suite L 26, Washington, DC 20007. Tel: 202-621-0536; e-mail: ccap@theccap.org; Web site: http://centerforcollegeaffordability.org

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Student Financial Aid; Incentive Grants; Input Output Analysis; Access to Education; Cost Effectiveness; Expenditure per Student; Student Costs; Paying for College; Finance Reform; Financial Policy; Audits (Verification); Policy Analysis; Cost Indexes; Supply and Demand; Consumer Economics

The primary purpose of government provided student financial aid is to increase college access by bringing the out-of-pocket price of attendance within reach of more students. The basic idea is quite straightforward. If a good or service costs $100 to buy and the government gives consumers a $50 subsidy, then consumers need only spend $50 of their own money instead of $100. Since the price has effectively been cut in half from the perspective of consumers, those who could not afford to buy the product before the subsidy can now afford to do so. This is all quite logical, but it rests upon the assumption that the seller does not change the price because of the subsidy. If the seller increases the price to $150, then the item's affordability has not been increased by the subsidy. Instead, the subsidy merely increases the price and the seller's income. While financial aid is designed to increase access by lowing prices, the authors show that recent increases in financial aid have not improved affordability and have therefore not increased access. They argue that the reason for this is that colleges are able to capture the aid by increasing prices. This does not suggest that colleges and universities are engaged in either collusive or venal behavior. Rather, these institutions are simply responding to the perverse incentive system they confront. The incentive system is what must be changed. (Contains 2 figures, 5 tables, and 13 footnotes.)

ERIC

16

2012

ED536147