College affordability is an issue that has received considerable attention from federal policy makers in recent years as concerns have arisen that a college education may be out of reach for an increasing number of students and families. While there is little disagreement that escalating college prices pose a problem, there is not a consensus about the precise causes for these increases. Among the possible explanations for price increases, one that has surfaced with some frequency in recent years is the notion that the availability of or increases in federal student aid may help to fuel price increases, as institutions seek to capture additional aid rather than stabilize or lower prices. This hypothesized relationship has received a good deal of attention and raised some concerns about the efficacy of federal student aid policies that aim to enhance access and affordability. This report has been undertaken in response to numerous congressional requests to explain what is actually known about the relationship between student aid and prices. In this report, this task is approached first through analysis of trends in prices, examining different measures and concepts of price. This is followed by a brief examination of trends in student aid, and an examination of many of the competing explanations for why prices are increasing. Finally, the report explores what is known about the possible causal relationship between student aid and price increases, principally through a survey of primary studies that attempt to isolate the effects of student aid on college prices. Some of the themes highlighted in the report are as follows: While colleges publish list prices, they also engage in fairly extensive price discounting, effectively reducing prices. Additionally, other subsidies such as governmental grants further defray the price students are asked to pay. Trends in college prices can be measured in terms of published prices, effective prices (prices net of institutional discounts), or net prices (prices net of governmental grant aid and institutional discounts). By any measure, in more recent years for which more comprehensive data are available, prices consistently increased at rates exceeding inflation. Overall, student aid per full time equivalent student has also increased in recent years although the trends in aid exhibit more volatility across years (than do the trends in price), sometimes escalating by large increments and sometimes declining or eroding from year to year. A plethora of potential explanations for escalating college prices exist. These include declining state appropriations on a per student basis and fluctuating endowments, which may lead to greater college reliance on tuition revenue from students. Similarly, the escalating cost of items upon which colleges are highly reliant, such as high-skill labor and technology, are identified as factors that increase the cost of providing education and potentially contribute to higher prices. Other explanations suggest that colleges have multiple institutional missions, have ineffective centralized control of costs, suffer from various types of productivity issues, and have institutional orientations and incentives targeted toward raising and spending considerable amounts to enhance students’ experiences as opposed to orientations toward using resources efficiently. In addition, it is often suggested that durable, or relatively inelastic, demand for postsecondary education may endow colleges as credentialing institutions with considerable pricing power (i.e., the ability to raise prices without destabilizing demand). There are a substantial number of seemingly plausible explanations for why prices are increasing. This makes it challenging to isolate the effects of any single factor. Through CRS’s review of research nine empirical studies have been identified, which over the last decade or so have attempted to isolate the effects of changes in aid on prices. Collectively, the studies focus on price responses associated with several different types of student aid, but the effects of grant aid on prices is the most heavily studied relationship. The relationship between prices and loans or tax assistance—the types of student aid that are most widely available and are available to students and families across higher income categories—is not the focus of much of this research. Concerns that colleges may “capture” some portion of the aid that is provided to students to lower their net price are generally not directly addressed in the studies. The studies are primarily focused on broad institutional price responses. That is, they do not typically address effects on prices for subgroups of students within institutions, and distinctions are not made between those students who are and are not receiving the student aid hypothesized to be affecting prices. Hence, questions about the extent to which aid policies aiming to lower the net price for targeted students actually do so are generally not directly addressed. The studies vary across many dimensions, including the main research questions explored, theorized mechanisms of causation (i.e., how they theorize aid would be captured by institutions), the analytical/methodological approaches employed to examine causality (e.g., natural or quasi experimental versus regression based approaches), selection and use of data, construction and use of proxy measures for aid and price, model specification, and universe of colleges and universities studied. This expansive set of differences makes it especially hard to compare and contrast the studies. There is not a high degree of consensus in the findings generated across the studies. Findings across studies are not consistent in terms of direction and magnitude of effects, and even within studies, changes in model specification or controls lead to vastly different results, often without strong rationales for the superiority of specifications generating more robust findings. Beyond the various differences in these studies and methodological challenges encountered across this research agenda, not having the outcome measure of primary interest available—a good measure of net price—is ultimately a substantial limiting factor in understanding the relationship between aid and price. Rather, the studies rely heavily on measuring change in list price or change in proxies for net price. This raises the fundamental question of whether, across the studies, the outcome variables actually measure change in the outcome of interest and suggests the need to develop more precise data on net price at institutions to further the understanding of the relationship between federal aid and college prices.
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