Subsidies Increase Tuition: Exhibit B

“Ladies and gentlemen of the jury, I offer you Exhibit B…”

In July of last year, I wrote about a study that found subsidized loans to be the culprit behind rising tuition. Now, a newer study comes to similar conclusions:

With all factors present, net tuition increases from $6,100 to $12,559. As column 4 demonstrates, the demand shocks— which consist mostly of changes in financial aid—account for the lion’s share of the higher tuition. Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks (column 7), net tuition only rises by 16%.

These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition (pg. 36).

“Remarkably,” writes economist Alex Tabarrok, “so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.” This just provides further evidence that “the Econ 101 insight that subsidies increase prices (even net for those who are not fully subsidized) holds true.”