Association for Public Policy Analysis & Management

Student aid is intended to offset the costs of postsecondary education for low-income students thus increasing equitable access to colleges. While evidence shows student aid does improve access, persistence, and long-term outcomes for students, there is the potential for unintended consequences when colleges act in their self-interest. The Bennett hypothesis – which suggests that colleges capture some increases in student aid as increased revenues – has been studied in a variety of nonprofit settings with mixed findings and has been supported in the for-profit sector by recent studies. Cellini and Goldin (2014) suggest that having access to Title IV funds yields an increase in for-profit college tuition approximately the size of the Pell grant.  Lau (2014) and Lucca, Nadauld, and Shen (2015) produce similar findings that also show tuition increases resulting from loan availability. The present study contributes an understanding of the impact of state-level student aid on net tuition revenue. The New York State Tuition Assistance Program (TAP) provides grant funds to low-income New York residents to be used at public or private colleges within the state. The TAP program is intended to provide financial assistance to low-income students in order to improve college access. Using a comparative interrupted time series design, the author takes advantage of a sudden increase in the TAP grant amount and examines the validity of the Bennett hypothesis as it pertains to state grants in the for-profit sector. Net tuition revenue at for-profit colleges within New York are compared to those of the rest of the country from 1995 through 2008, so as to measure the impact of the 1999 change in the TAP program. The design includes both state and year fixed effects in order to account for state and national trends. This study shows evidence that supports a similar notion as the Bennett hypothesis for state level grants at for-profit colleges. The increase in award amount and the expansion of the eligibility for the grant is found to increase net tuition revenue at proprietary colleges in New York State by nearly 16 percent. This growth provides additional evidence that for-profit colleges behave in a way that maximizes profits. Although some of the additional grant dollars appear to raise instructional spending at colleges, it is likely that a principal-agent problem exists. Proprietary schools may fail to act in complete accordance with governmental wishes and repurpose student aid as increased profits rather than allowing the aid to simply offset costs for low-income individuals. The implications for state policy makers are to cautiously consider the unintended consequences of student aid expansion and to assess potential regulations on the for-profit market in conjunction with aid programs. These findings suggest that monitoring of proprietary college behavior is necessary and that the sector may be particularly susceptible to externalities from policy changes.