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This paper determines that the main cause of the increase in net tuition is declining state grants and appropriations at public institutions and increased access to student loans at private institutions, in support of the Bennett Hypothesis. Instead of causing the increase in net tuition, increased external student aid cushioned arguably necessary increases in net tuition at public institutions. Baumol’s Cost Disease is investigated, but no evidence is found to support its claims, except to some extent at Bard College, which was analyzed separately. Instead, cost-cutting strategies are pervasive at many institutions, decreasing their reliance on tenured faculty. The market for higher education is imperfectly competitive, which is supported both theoretically and empirically through a fixed-effects regression model; competitive markets might not be good proxies of the higher education market. It is maintained that, despite increases in tuition, investments in higher education remain quite profitable for most students. Competing for peer inputs and maximizing quality is extremely costly for institutions; students are footing the bill for an increasing share of the cost of producing their education, yet still receive subsidies to bring price below cost. Endowment and private gift revenues could provide increased subsidization at private institutions while public institutions appear to be doing the best they can, given the “perfect storm” of declining revenues and increasing costs.
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Donlon, Christopher Cassidy, "The Economics of Higher Education: Accounting for the Increase in Net Tuition" (2016). Senior Projects Spring 2016. 73.