When federal (and state) financial aid programs make money
available to well-off students, it is in a college's interest to
capture that aid and use it to 'improve' the college, thus driving
up costs and tuition. Aid must be restructured so that more of it
goes to needy students.
Something is fundamentally wrong with America's college financial
aid system when students from families with triple-digit incomes
receive plenty of federal aid - while the less well-off are
scrambling for it.
According to the Department of Education, 35 percent of dependent
students from families making at least $100,000 a year received
Federal Stafford Loans in 2008, and 15.6 percent received the
"subsidized" variety (where the government pays the interest while
the student is in school). Stafford loans account for 82 percent of
all federal financial aid lending.
Two theories compete to explain this, and they offer radically
different policy prescriptions.
The first explanation holds that college costs are mostly
determined by factors over which colleges have little control, such
as prevailing faculty salaries. Colleges can do little other than
react by setting tuition to cover costs.
If students are having to pay more, then financial aid and state
appropriations budgets must be inadequate. The solution is
straightforward: The federal government should increase the money
available for financial aid.
We think this theory is incorrect. An alternative, which holds
that the real problem is out-of-control spending in higher
education, provides the better explanation.
Under this view, more money for financial aid will simply be
absorbed as college spending increases. Our research (most notably
our 2009 study, "Financial Aid in Theory and Practice") found that
increased financial aid can be downright counterproductive by
fueling the academic arms race - a major driver of the cost and
tuition explosion in higher education.
The underlying problem is that the "value-added outcomes" of
colleges (how much their students learn, how much their skills
increase, etc.) are not easily observed or measured. That largely
precludes colleges from competing based on the education they
Instead, they compete on prestige or reputation. Their goal is to
signal high quality, and the easiest way to signal that is to have
high-quality "inputs," such as prize-winning faculty and state-of-
But these are costly, and without a measure of the true benefits
they bring to a school, cost-benefit analysis cannot reliably guide
decisions. Thus, anything that has a plausible claim of improving
the institution will be funded if money is available, with the final
allocation of spending largely determined by stakeholder struggles
among constituencies of the university. …