There’s a conservative talking point that opposes federal aid for college because, they claim, the aid just gets absorbed into higher tuitions. Careful research does find such linkages when it comes to for-profit schools, but much less so when it comes to publics and non-profits, which is where about 90% of undergrads get their higher ed (see figure).*

Advertisement:

Source: NCES

It is reasonable to ask whether outside aid get just gets capitalized into tuition. To the extent that it does, it’s a transfer from taxpayers to the various beneficiaries of higher tuitions, including administrators and (some) professors. But it’s by no means a slamdunk that such a transfer occurs. It depends on both elasticities and institution constraints.

The more inelastic the demand is for a product, the more the subsidy can end up going to the wrong person. If parents and kids are willing and able to pay almost any price, then sure, colleges can take a $1,000 Pell grant and just add that amount to the tuition.

Advertisement:

A column in today’s WSJ reports evidence of this sort of transfer, but the results apply exclusively to private, for-profit schools:

The study’s authors warned their findings don’t apply to public colleges and private nonprofit schools, which they say are different because they aren’t motivated by profits and because their prices are largely determined by state funding and donations.

Research shows that tuitions at the public universities, where 75% of students enroll, are very much a function of revenue flows. Thus, when they hit recession—and remember, states must balance their budgets—a couple of unfortunate things tend to happen at the same time. First, tuitions tend to rise, and second, with the increase in unemployment, more young adults decide that given the weak job market, this would be a good time to get some more education. (Another interesting strain of research finds that increased state Medicaid costs has also led to higher tuition at public universities.)

So that’s when you’d actually want to ratchet up Federal aid, which is in fact what the Obama administration did with the American Opportunity Tax Credit and significant increase in Pell grants.

Advertisement:

Conservatives who oppose these measures often complain that they don’t really lower tuitions because they’re directly capitalized into the price, but in the majority of cases, that’s wrong (Rep Paul Ryan goes after Pells particularly aggressively). We might well want to exclude those institutions that abuse federal aid from the programs that grant them, but they are a minority. If we want less advantaged kids to have a fair shake at getting to and getting through college, these aid programs are essential.

*The research on which the WSJ column is based notes that not all private, for profits are eligible for federal government aid. By definition, the tuition-hike story does not refer to them, of course.