Colleges Accused of Siphoning Federal Aid

Washington spends $65 billion a year on federal student aid and the debate about how to pay for an extension to the Stafford loan subsidy, which has broad bipartisan support in concept, continues to rage on in Congress. However, an increasing number of people are beginning to question who exactly this aid benefits. While for many years it was accepted without question or analysis that aid benefitted students who wouldn’t otherwise be able to afford to go to college, a recent paper by Andrew Gillen updated the Bennett Hypothesis of the late 1980s to highlight what conditions are necessary for federal aid to work in its stated goal, and that the absence of these conditions leads not to student benefit but enrichment of greedy colleges.

Now, Tamara Keith, writing in The Atlantic, notes that a significant portion of federal aid in education is little more than corporate welfare.

Stephanie Riegg Cellini of George Washington University and Claudia Goldin of Harvard have provided compelling new analysis. Cellini and Goldin looked at for-profit colleges, utilizing the key distinction that only some for-profit schools are eligible for federal aid. Riegg and Goldin find that that aid-eligible institutions “charge much higher tuition … across all states, samples, and specifications,” even when controlling for the content and quality of courses. The 75 percent difference in tuition between aid-eligible and ineligible for-profit colleges — an amount comparable to average per-student federal assistance — suggests that “institutions may indeed raise tuition to capture the maximum grant aid available.”

As Keith notes, students have little choice but to attend college if they are in anyway aspirational. The difference in annual earnings for the holder of an undergraduate degree as compared to a high school diploma is around $30,000. Even fields such as computer science where a college diploma is little more than signaling and practical experience and ability is both easily demonstrable and much more important still require a college diploma in the vast majority of cases.

In American society, being without a degree can constitute a significant professional handicap, so a college diploma is essentially an inelastic good. Universities can charge what they like with little effect on demand; they have no incentive to use the aid to lower costs to the student.

Keith examines where the federal aid is being spent, noting that teacher salaries aren’t rising out of line with inflation:

A more likely suspect is administrative staffing, where the number of employees per 100 students has risen by 13 percent over the past decade. The largest increases in both salaries and staffing have been for private universities, bolstering the view that private schools have greater abilities to capture federal dollars.

05 23, 2012