The "Bennett Hypothesis" is the theory that : The availability of federal loans -- particularly subsidized loans offering a below-market interest rate and payment of interest as long as the student is enrolled in school -- provides "cover" for colleges to raise their prices, because students can offset a price increase, or at least a portion of that increase, with federal loans.
This report examines research that attempts to prove or disprove the Bennett Hypothesis, with a focus primarily on the impact of federal grants and loans on college and university tuition price increases. Section two presents a brief overview of federal student financial aid programs, recent trends in tuition prices, and the economic theory behind financial aid and tuition prices. Section three reviews some of the research that has analyzed the veracity of the Bennett Hypothesis over the years.
Section three also describes studies with similar methodologies but contrary findings. The research suffers from limitations in the data used, particularly in the measures of federal aid used as predictors. There are also limitations in the data analysis methodologies employed, including the researchers' inability to fully control for all of the complex factors that go into the decisions that institutions make when determining tuition prices. More details about these issues are presented in this section. The final section summarizes what this body of research tells us about the relationship between federal student aid and tuition prices.