Conservatives have long worried about the Bennett Hypothesis. Named for former Education Secretary William Bennett, it argues that the availability of federal financial aid programs leads colleges to increase tuition faster than they otherwise would.
Conservatives have been right to worry. But there’s a way to break that link—by changing how we determine aid eligibility.
While some older studies found no relationship between financial aid and tuition, they used limited data and unreliable methodologies. Newer studies with more reliable data and better statistical techniques have consistently found evidence supporting the Bennett Hypothesis, though the relationship is typically less than $1 for $1.
Fundamentally, the Bennett Hypothesis emerges because colleges essentially compete in a zero-sum game for relative standing. Due to the lack of measures of output and outcomes, colleges cannot compete on quality and instead compete based on reputation/prestige/excellence. Essentially, they use high-quality inputs as proxies for quality because there is no way to demonstrate high quality directly. Since high-quality inputs are costly, and colleges are playing a zero-sum game of relative position, there is no limit to what college[s] will spend in the pursuit of excellence.
When this insatiable need for more money is paired with our current financial aid system, the results are disastrous. The federal aid system lets each college determine its own Cost of Attendance (COA)—the costs for tuition, room and board, books, etc.—which is then used to determine how much federal financial aid a student is eligible for. Until each aid program cap is reached, a $1 increase in COA results in $1 more in aid.
Thus, the Bennett Hypothesis is a behavioral response by colleges to a statutory relationship between aid and tuition. We can, therefore, fight the Bennett Hypothesis on two fronts.
As I point out in a new study, the statutory relationship could be amended by replacing the COA with the Median Cost of College (MCOC). Under the MCOC, aid eligibility is determined based on the median college’s COA rather than having eligibility determined separately for each college. As I detail in the study, this should be done on an enrollment weighted and program-level basis.
The MCOC tames the Bennett Hypothesis because when a college raises tuition by $1, it doesn’t change the aid their students are eligible for (except in a few rare cases), removing a powerful incentive to raise prices.
Moreover, the MCOC would improve the financial aid application process by better protecting privacy and providing students with information on their aid months sooner than under the current system. It would, therefore, be a worthwhile reform even if it didn’t have any impact on the Bennett Hypothesis.
While the MCOC would tame it, to truly end the threat posed by the Bennett Hypothesis, we need to shift from the current dysfunctional competition that drives prices up to the normal competitive pressures that drive costs down. The only way for that to happen is for more information on college quality and outcomes to be publicly released, which the MCOC would encourage.
Since the MCOC treats all colleges equally until there is evidence of quality differences, the MCOC provides a strong incentive for colleges to measure and improve quality. As these measures displace reputation, competition will function as the normal evolutionary selection mechanism that improves quality and lowers costs, rather than as a force encouraging ever-higher spending.