Sunday, November 12, 2017

Robert Kelchen (Seton Hall), An Empirical Examination of the Bennett Hypothesis in Law School Prices:

Whether colleges increase tuition in response to increased federal student loan limits (the Bennett Hypothesis) has been a topic of debate in the higher education community for decades, yet most studies have been based on small increases to Pell Grant or undergraduate student loan limits. In this paper, I leverage a large increase in Grad PLUS loan limits that took place in 2006 to examine whether law schools responded by raising tuition or other living expenses and whether student debt levels also increased. Using data from 2001 to 2015 across public and private law schools and both interrupted time series and difference-in-differences analytical techniques, I found rather modest relationships across both public and private law schools. I conclude with some possible explanations for the lack of strong empirical support for the Bennett Hypothesis.

My analyses suggest that the large increase in federal borrowing limits did not induce law schools to substantially increase tuition and fees (funds they do receive) or living allowances (funds they do not receive). However, the difference-in-differences models do suggest that any responses that do exist may be concentrated among public law schools instead of private nonprofit programs. This runs counter to prior literature at the undergraduate level (Lau, 2014; Lucca et al., 2015), but could be explained by the lack of tuition and fee controls in professional education that often exist for bachelor’s degree programs at public colleges and universities.

I offer three potential factors that could explain the relatively modest relationship between law school prices and the availability and attractiveness of federal student loans for students. First, law schools as a whole did not appear to actively attempt to engage in additional rent-seeking behavior by increasing their prices in an effort to gain additional tuition revenue. Some programs have responded to particular incentives under Public Service Loan Forgiveness to shift the incidence from students to taxpayers (such as the Georgetown Law example discussed earlier), but there appear to be few institutions that sharply increased tuition rates above and beyond what they were doing prior to 2006.

The second potential explanation is that since law schools are an example of a higher education marketplace in which prospective students have reasonably good information about individual programs, a program that increases tuition more than its competitors may have seen a decline in enrollment—and potentially overall tuition revenue. If all law schools raised tuition by a similar amount, this concern could be lessened. Yet game theory suggests that programs have a strong incentive to deviate from the consensus in order to increase enrollment levels of price-sensitive students, and this could be particularly true in the post-Great Recession environment in which the number of prospective law students fell precipitously.

Finally, it is possible that the number of law students who faced credit constraints prior to the adoption of the Grad PLUS program could have been relatively low due to the presence of a robust private loan market during the 2000s. There is evidence that the adoption of Grad PLUS, combined with improved income-driven repayment terms, induced students to switch from private to federal loans during this period (Bhole, 2017). It is likely that Grad PLUS loans extended access to capital to at least some students, but a sizable percentage of students could already access loans up to the full cost of attendance.

https://taxprof.typepad.com/taxprof_blog/2017/11/increases-in-federal-student-loan-limits-do-not-induce-private-law-schools-to-raise-tuition.html