Final Report

Final Report | The Relationship Between Federal Subsidies and College Tuition

Introduction

This research seeks to determine if there is a relationship between the rise in college tuition and the rise in federal subsidies offered to students. Past research and literature suggest that federal subsidies directly causes colleges to increase tuition, as the institutions recognize that as students receive more federal aid, they are willing to pay more, if they receive more. This study is based on the original suggestions made by the Bennett Hypothesis. This states that providing a cost subsidy in a form of a loan increases demand for higher education. As demand increases more quickly than supply, quantity will increase, however so will prices.

 

Literature Review

Does Federal Student Aid Raise Tuition? By National Bureau of Economic Research

Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs by the Federal Reserve Bank of New York

New Evidence on For-Profit Colleges by Stephanie Cellini and Claudia Goldin

Research Question

Do federal subsidies benefit lower income students through tuition debt reduction more than their cost of increased college tuition?

 

The Model

Yi = B0 + B1Xi  + B2X2 + B3X3 + B4X4 + B5X5 + ei

Yi = School tuition

X1 = PCE (Headline)

X2 = Federal government subsidy per enrolled student

X3 = Student program debt cap

X4 = Median PDI per capita

X5 = Net tuition of median student

 

Conclusion

Expanding our study on the relationship between federal subsidies and college tuition, we conclude that factors such as: interest rates, household debt, GDP from CPI, and earning differences in year t are all factors that must be considered in defining the affect federal subsidies offered, further affecting the rise in college tuition. Lower income students are most affected by federal subsidies and show the greatest opportunity to study determining factors.

 

Recommendations for Public Policy

To  further improve this relationship, I would recommend investigating trends in U.S. households and financial institutions deleveraging, their debt levels in respect to GDP fall and taxpayer support rises, therefore support per enrolled student increasing. Both of these trends should decrease college tuition inflation.

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