By Arthur M. Hauptman
Arthur M. Hauptman is a higher education policy consultant and author in Arlington,
The following was adapted form an article written for Trusteeship, published
by the Association of Governing Boards of Universities and Colleges.
CONGRESS ESTABLISHED the National Commission
on the Cost of Higher Education in 1997 to investigate the growth in college costs
and to suggest what, if anything, the federal government should do about it. Under
the auspices of the Council on Aid to Education, I wrote a report to the commission
with Cathy Krop, a researcher with the RAND Corporation, that examined the relationship
between college costs and federal student aid. We reached two conclusions:
The ready and growing availability of federally sponsored loans has been a key factor
in the rapid growth of college tuition and other charges over the past two decades–a
period when tuition has increased at roughly twice the rate of inflation.
Federal grant aid has played a less substantial role in growth of college tuition
than loans, in large part because grants now provide far less financing than loans.
In its final report, the National Commission essentially ignored the relationship
between student loans and college tuition, relegating our report to an obscure footnote.
Skeptical commission members and other critics made the following two arguments
for not addressing this issue: First, they said no empirical evidence exists that
loans contribute to college cost increases or that college officials are using federal
student aid programs to gouge the public; and second, even if federal loans have
contributed to tuition increases, there is nothing short of price controls that the
federal government can do to address this issue.
The question of whether federal student aid has fueled the growth in tuitions and
other charges has been the subject of heated debate at least since the mid-1980s
when Secretary of Education William Bennett argued that colleges and universities
were chasing their own tail by relying on federal student aid to raise their tuitions
and other charges at a rate much greater than the general rate of inflation.
An alternative view advanced by most higher education officials has been that
there is no correlation between increases in federal student aid and the rapid growth
in tuitions and other charges.
As is often the case in public policy debates, both positions probably have been
The proportion of total costs of attendance met through federal student aid–grants,
loans and work-study–has increased dramatically over the past two decades. Federal
student aid in 1975 represented less than one-tenth of the total costs of attendance
in the public sector and less than one-fifth in the private sector.
In 1995, federal aid paid more than two-fifths of the total costs of attendance
faced by college students. Federal aid covered nearly one-half of the total costs
of attendance for public college students and nearly two-fifths of the costs for
private college students.
Federal loans have become a particularly important source of funding for college
students and their families. Federal loans accounted for more than one-third of total
costs of attendance in 1995, compared to less than one-tenth in 1975.
Given the growing importance of federal loans in paying for college, it is increasingly
difficult to argue that they have had no effect on tuition-setting at many institutions.
This is not to say that college officials stay up nights figuring out how they can
set tuition and other charges to maximize the federal aid eligibility of their students.
Many other factors probably play a more important role in tuition pricing decisions.
At the very least, however, the tremendous growth in the availability of federal
loans has facilitated the ability of both public and private colleges to raise their
tuitions at twice the rate of inflation for nearly two decades without experiencing
decreases in enrollment or other clear signs of consumer resistance. In particular,
it seems evident that private colleges could not have stabilized their share of total
enrollments over the past two decades without the tremendous expansion in federal
The potential effect of federal loans on college tuition levels is magnified by
the fact that, since 1981, student eligibility for the federal in-school interest
subsidy has been determined by subtracting family resources and grant aid from the
student’s total costs of attendance. As a result, eligibility for loans and loan
subsidies grows as tuitions and other charges increase, constrained by the amount
of annual and cumulative loan limits. Thus, whenever federal loan limits increase,
the potential link between tuitions and loans strengthens.
By using total costs of attendance, the federal aid formulas also ignore the growing
use of discounting at many institutions. Both public and private institutions have
greatly increased the discounts they provide in the form of grant aid from their
own resources. While more and more students and families do not pay the full sticker
price for tuitions, fees, and room and board, the current aid system continues to
calculate federal aid eligibility as though the stated costs are what people actually
When the discounts provided by institutions are subtracted from the total costs
of attendance, federal student aid in 1995 covered more than half of public sector
costs of attendance minus institutional aid and nearly half of the “net” private
sector costs of attendance.
Although federal policies have not been the principal factor in the growth of
college costs and tuitions, the federal government should consider taking two steps
to reduce the potential impact of federal student aid on college costs:
First, the federal government should no longer recognize total costs of attendance
in determining eligibility for federal loan subsidies. Instead, only a portion of
tuition (say, 50 percent) over some base level (e.g., $3,000, average public sector
tuition) and a standard amount of living expenses should be used in determining eligibility
for federal loan subsidies. In addition, there should be an overall limit on the
amount of federal aid students may receive in any year.
The combination of partial cost reimbursement and an annual limit on federal aid
would have other beneficial effects in addition to moderating incentives for tuition
inflation. Federal loan subsidies would be better targeted on students from lower
income families, unlike current policies in which students with family incomes well
in excess of $100,000 are subsidized if they attend high-priced institutions.
While some will argue that the proposal for partial cost reimbursement is a form
of price control, it is not. Institutions would not have to charge below a specified
limit in order for their students to be eligible for federal student aid; nor would
the federal government need to monitor what institutions charge.
Federal price controls and federal monitoring of college charges are inappropriate
mechanisms for dealing with the issue of college costs. However, it is clear that
the federal government has a right and a responsibility to the taxpayer to make a
policy determination about how much of tuitions and other charges it is willing to
Second, the federal government should reduce the regulatory and reporting requirements
for institutions that demonstrate they are doing a good job in administering the
federal student aid programs.
Many college officials argue that the costs of complying with a wide range of
federal laws, regulations and reporting requirements have been an important factor
in the overall growth of college costs and tuitions.
In the federal student aid programs, the prevailing philosophy in both statute
and regulations has been to impose the same rules and reporting requirements on all
institutions regardless of how well they administer the federal aid programs. Thus,
an institution with a student loan default rate of two percent must comply with the
same set of requirements as an institution with a 20 percent default rate.
A system of performance-based deregulation could be designed to make distinctions
among institutions, based on a series of readily available program performance indicators.
Such a shift in regulatory philosophy in the federal student aid programs not
only would reduce the costs of high performing institutions, it also would allow
federal officials to focus their limited resources on institutions that demonstrably
are not performing at a minimum level.
The fact that the Cost Commission was unwilling to address the relationship between
college tuition and student loans does not mean a relationship does not exist. The
public still is concerned that college costs too much, and many people take the common
sense view that federal student aid has played a major role in the growth of college
tuition and other charges.
In the long run, the higher education community will be better served by taking
responsible positions on this issue than by hoping it will go away.