This is still a rough draft and stuff still needs to be added onto this but here’s what I got so far. The second point why EFC is not a good indicator for Financial Aid is the Bennett Hypothesis. The Bennett Hypothesis is according to Gillen “colleges will raise tuition when financial aid is increased, … Continue reading Portion of Formal Report Project →
This is still a rough draft and stuff still needs to be added onto this but here’s what I got so far.
The second point why EFC is not a good indicator for Financial Aid is the Bennett Hypothesis. The Bennett Hypothesis is according to Gillen “colleges will raise tuition when financial aid is increased, with the implication that increases in financial aid will not improve college affordability.” Basically, this is saying that the more financial aid is offered the more colleges and universities can increase their tuitions.
To break down the Bennett Hypothesis even further it can follow these sequences of events. First, the colleges want to improve, and they can do this by increasing their revenue. The colleges notice that there is a lot more generosity with the financial aid so there is an opportunity to raise the tuition to capture some of the financial aid in order to raise their revenue. Some colleges will seize the opportunity but the ones that don’t take advantage of it will give in at some point in order to not fall behind.
To help understand this let’s look at some supply and demand graphs supplied by Gillen:
Key for the graph:
Q = Students
$= Money
T=Tuition
Taid= new tuition level
D=Demand Curve
Daid = new Demand curve
G = Financial aid in the form of a grant
S = Supply
Panel A is the supply and demand graph that is most common when associated with the Bennett Hypothesis. Panel A assumes a college is held back by capacity meaning that the supply is vertical or inelastic. Then the government offers grants G to each student. This raises the demand curve up by G. The point of intersection with the new demand curve and the supply is Taid. The change in the supply and demand graph is one for one. That’s why financial aid doesn’t really help make college more affordable, it’s like you’re still paying the same amount.
Panel B is similar to panel A except that the supply is horizontal (perfectly inelastic). The tuition does not change but there is an increase in the number of students. Panel C is where it’s a normal supply and demand graph. The grants offered by the government still shift the demand to the right. Thus this leads to an increase in the tuition and number of students.
If you’re not convinced with the original Bennett Hypothesis maybe the second version of the Bennett Hypothesis will be more convincing. The Bennett Hypothesis 2.0 mainly improves on three points according to Gillen:
- All aid is not created equal
- Selectivity, tuition caps and price discrimination are important
- Don’t ignore the dynamic story
The first point is about how financial aid is distributed. The low-income students who with financial aid such as the Pell Grant will not allow colleges to raise their tuition. However, financial aid that is available to everyone can make colleges raise their tuition. The second point is about tuition caps and price discrimination. Tuition caps are mainly about public colleges/ universities where their tuition is capped so that they can receive funding from the state. Most colleges will not cap their tuition to improve their student body. Price discrimination is mainly used by private colleges. The private colleges will charge more or less to students depending on the student’s financial background. The dynamic story is changes over time. In the case that colleges do increase their revenue they will more likely use it to improve their institution. Then it becomes something of a domino effect, say college A notices that college B is improving their campus and college A is like “hey we need to improve our school so that we don’t lose students to college B” so college A will increase their tuition or costs in order to keep up with college B. Then a whole bunch of colleges will follow suit.