This piece was co-authored with Grayson Cooper.
From the 2001-2002 academic year to the 2011-2012 year, tuition and fees at public four-year universities have increased by an average of 5.6% per year above inflation. Federal financial aid packages enable universities to substantially increase tuition without pricing out low-income students. Simultaneously, these universities are able to capture more revenue from this guaranteed federal source. Drastic tuition increases can have significant impacts on enrolled students, who, unlike students applying for their first year, have fewer options to respond to tuition increases.
When students first apply for college, they almost universally complete the Free Application for Federal Student Aid (FAFSA). This is partially because college applicants apply to a range of colleges with varying costs and have little information regarding their qualification for financial aid. Students already enrolled in college may not have the same access to financial aid as newly enrolling students. Students who have not qualified for financial aid may view their one-time denial as indicative of their future potential for aid. While they may apply if their financial situation worsens, they may not view tuition increases as warranting re-applications.
FAFSA’s challenges include complexity and late notification. It requires 10 hours to complete the 127-question form, making it more complex than filing a tax return with an IRS 1040 form. As students do not receive their financial aid decision until spring of their senior year, low-income students don’t receive the information in time to influence college decisions. Once in college, FAFSA’s late notification presents a greater challenge because it does not provide time to transfer, leaving students to drop out if they do not receive sufficient aid.
In recent years, post-secondary institutions have endeavored to ensure that students attend regardless of their financial situations. However, the focus has been on acceptance, as financial aid policies are consistent throughout the student’s college career. The continuance of financial aid is crucial to these students’ uninterrupted enrollment. Low retention rates have implications for the institution’s prestige and accreditation. Therefore, colleges have an incentive to address this easily preventable source of dropouts. Stipulating maximum increases in federal student aid would result in universities choosing to either price discriminate or contain tuition growth. Universities would have to draw from university financial aid tuition increases, imposed on wealthier students, to offset financial aid. However, in the absence of increased federal aid, this becomes prohibitively expensive; with higher tuition costs, fewer students pay full tuition diverting more money to offsetting others’ tuition.
Market forces ultimately moderate the increases for the students who are paying tuition. This proposal reduces the subsidy effects of federal aid on tuition by only allowing tuition to be significantly increased when students are first selecting a college.
The federal government should establish maximum increases in aid for currently enrolled students for a given level of expected family contribution. This forces institutions to shift tuition increases to first-time enrolling students, who can make informed decisions regarding cost. This will also allow market forces to exert greater influence on tuition as universities seek to attract new students.