The Chronicle of Higher Education's news blog reports that a new study by two economists at the University of Oregon shows that a majority of the money given by the federal government in Pell grants to students as financial aid goes back to universities as higher tuition (evidence of what's known as the Bennett hypothesis). But this is not true for in-state tuition rates at public universities. From the working paper by Larry Singell and Joe Stone:

Based on a panel of 1554 colleges and universities from 1988 to 1996, we find little evidence of the Bennett hypothesis for in-state tuition for public universities. For private universities, though, increases in Pell grants appear to be matched nearly one for one by increases in tuition. Results for out-of-state tuition for public universities are similar to those for private universities, suggesting that they behave more like private universities in setting out-of-state tuition. Notably, we also find that both higher state appropriations and endowment incomes permit public universities to charge higher out-of-state tuition, presumably because the larger pool of resources makes the university stronger and more attractive to students. Overall, then, there is evidence both for and against the Bennett hypothesis. Specifically, the evidence for in-state tuition charged by public universities tends to reject any substantial or significant effect; alternatively, the evidence for out-of-state public and private tuition tends to support the Bennett hypothesis.

Collectively, the results suggest that the pricing behavior of higher education institutions is sensitive to both political and market interests, as well as, perhaps, to individual institutional objectives with regard to access for needy students. The fact that out-of-state tuition appears to respond to the level of the average Pell grant, while in-state tuition does not, suggests that public universities are either explicitly or implicitly constrained to maintain low-cost access for instate students, but not necessarily out-of-state students.

The effect could be more than 80% of Pell grants being recaptured through higher tuition, so that students get less than twenty cents on the dollar of the money allocated by Congress. They also find little evidence that the Pell grants are changing the relative net tuition price for needy versus non-needy students. The results are relatively new and differ from the received literature (for example Long or Rizzo and Ehrenberg) but appear to use a more complete dataset than the other studies.

Labels: economics, higher education