In his State of the Union address last month, President Barack Obama implored colleges and universities to decrease the cost of getting a degree.

“It’s not enough for us to increase student aid,” he said. “We can’t just keep subsidizing skyrocketing tuition; we’ll run out of money.”

One month later, Penn announced a 3.9-percent raise in tuition, coupled with a 7.7-percent increase in its financial aid budget.

“The financial model in higher education is broken,” Graduate School of Education professor Joni Finney said of the industry as a whole, speaking at a panel discussion on college affordability at Penn on Friday.

“I can tell you that no amount of Pell grant increase [which provides need-based grant money to low-income students] and no amount of state-based, need-based financial aid increase is going to address this problem if we don’t address the problem of college costs.”

The Bennett hypothesis

In fact, a theory circulating in academia for several decades alleges that increased financial aid itself leads to increased tuition.

The theory was popularized in a 1987 New York Times opinion piece titled “Our Greedy Colleges” by then-United States Secretary of Education William Bennett and subsequently became known as “the Bennett hypothesis.”

“Increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase,” Bennett wrote. “Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.”

Scholarly studies of the Bennett hypothesis have resulted in mixed appraisals, and the theory has been neither widely accepted nor refuted.

In a 2003 study of 71 universities from 1983 to 1996, two University of Oregon economists found that the Bennett hypothesis didn’t hold for public or lower-ranked private universities. “For top-ranked private universities, though,” they wrote in their abstract, “increases in Pell grants appear to be more than matched by increases in net tuition.”

This month, the Center for College Affordability and Productivity published a paper titled “Introducing Bennett Hypothesis 2.0,” updating the original theory.

By tweaking some initial assumptions abut the hypothesis, Andrew Gillen — research director at CCAP and the author of the report — found that the data supported the overall theory for most schools in the long term.

“As higher financial aid pushes costs higher, it inevitably puts upward pressure on tuition,” he wrote in the paper. “Higher tuition, of course, reduces college affordability, leading to calls for more financial aid, setting the vicious cycle in motion all over again.”

But Gillen doesn’t believe that Pell grant increases lead to tuition hikes. Because they’re meant to help low-income students, “Pell grants are unlikely to lead to that kind of problem,” he said.

Gillen instead finds fault with tax credits and unsubsidized Stafford loans — a type of federal loan not based on financial need — which “allow schools to raise the tuition a little bit.”

“The school basically captures the financial-aid money” aimed to help students, he said.

Financial aid at Penn

In a budget proposal released this month, Obama called to increase the maximum Pell grant award to $5,635 — $85 more than it is now. He also aimed to increase campus-based financial aid, including work study, to $1.1 billion and increase the federal Perkins Loan Program from $1 billion to $8.5 billion.

About 15 percent of Penn students receive funding from Pell grants, according to Director of Student Financial Aid Bill Schilling.

“The increase in the Pell grant [in Obama’s budget] is a good thing,” Schilling said. “It will have some impact on Penn.”

But that impact will be tempered by the fact that only a small percentage of aid for Penn students comes from the government, Schilling said. “In the big picture, it’s not a huge impact on Penn.”

Loans, too, are not a large component of financial aid for Penn students.

Of the financial aid that went to 5,514 undergraduate students in the 2010-11 school year, only $27.3 million came from educational loans, according to the University’s 2011 financial report; the other $190.2 million came from grants, tuition waivers and work-study programs. The amount from educational loans was a 44 percent decrease from the $48.7 million in loans the previous school year.

Dean of Admissions Eric Furda praised Penn’s financial aid policies, which have led to decreased net tuition for aided students since 2004. The University itself offers students a no-loan institutional aid package.

Although some families “use loans as an opportunity to fund their children’s education,” he said, “[Penn’s] institutional commitment to funding need-blind financial aid and no-loan policies should not be taken for granted … These are incredible commitments.”

In part because of these policies, GSE professor Laura Perna said of the Bennett hypothesis, “I don’t think it has much application to a place like Penn.”

Penn’s total charges crossed $50,000 in 2010, and the University joined a small group of schools with costs so high. Total charges are almost $54,000 this school year and will rise to more than $56,000 next year.

“It’s only the elite schools that are able to charge that much,” Gillen said.

Part of the reason total charges increase at a rate much higher than inflation is that the costs associated with running a university — including healthcare and personnel costs — tend to increase every year, Perna said.

In the 2011 fiscal year, 12.4 percent of the University’s operating revenue came from revenue from tuition and student fees, according to the University’s financial report.

The effect of competition

But another major reason costs keep rising, Gillen said, is competition among schools.

In a typical competitive industry, costs tend to go down over time, he said. But the opposite is true in higher education.

“Colleges can’t compete the way other businesses compete. Businesses compete on value,” he said. “The way universities evaluate themselves is essentially the U.S. News & World Report rankings.”

Because the rankings are a zero-sum game — “if you move up, somebody else moves down” — schools are in constant competition, Gillen said.

The typical way to move up in the rankings is to spend money on improvement, he argued. “Colleges compete on perceived excellence … In order to become the next Yale, you need to spend a lot of money.”

Yale University’s total charges were comparable to those of Penn this year — almost $53,000. While most peer schools have not yet released tuition rates for the next year, Stanford University announced a 3-percent increase and Cornell and Princeton universities will implement 4.5-percent increases.

Universities are indeed “paying attention to what they think their competitors are doing,” Perna said.

In this sense, Gillen believes that a college’s decision of whether to raise its tuition is a prisoner’s dilemma of sorts.

Because an individual university is unsure whether one of its competitors will increase its charges and thus be able to spend more money on improvement projects, the only rational choice is for it to raise its own tuition.

“For the colleges, this is not a big deal,” Gillen wrote in his report. “All raising tuition did was allow them to maintain their current relative ranking (since both colleges improved, their relative ranking did not change).”

“But from the perspective of society,” he wrote, “this is very problematic.”


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Cost of Penn education to rise 3.9 percent
Board of Trustees convenes to discuss University finances, academic policies


INTERACTIVE: Penn total costs 2003-present

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