Effects of cost on postsecondary education enrollment

Postsecondary education is widely recognized as a driver of economic growth and competitiveness, especially as the global economy becomes increasingly knowledge-driven. However, the cost of obtaining a postsecondary education in the United States has been increasing over past twenty years. At the same time, there have been changes in the amount and type of financial aid available to students. This study utilizes panel data methods to analyze the impact of tuition rates and various measures of financial aid on enrollment in post-secondary institutions. It contributes to the literature on education production functions, and specifically addresses the gap in this literature with respect to substitution and complementarities between different post-secondary education institutions.

State-level panel data are assembled for 2000-2013, the period enveloping the recent Great Recession and the milder 2000-2012 recession. These data include total enrollment figures, tuition and fees, and financial aid (state, federal, and local/grant). Models also control for state socio-demographic characteristics such as poverty and unemployment rates, age, and population.  In addition, state and time fixed effects account for unobservable time-invariant state-specific heterogeneity and overall national trends in the education markets.  The empirical specifications further model how changes in the relative price of private vs. public (both 2-year and 4-year) institutions affect enrollment in each, and the degree of substitution across these options.

Preliminary results suggest strong and significantly negative own-price elasticities, with larger magnitudes for public institutions.  Estimates also indicate that there are complex substitution effects in the postsecondary education market, specifically between 4-year public and 4-year private colleges. Increases in state and federal financial aid are found to moderate some of the adverse effects of higher tuition costs on enrollment. 

As education imparts strong social benefits in addition to private benefits for the average individual, which may not enter an individual’s cost-benefit calculus, there is under-investment in education.  The findings from this study inform the importance of certain barriers to educational investments and the substitution possibilities that potential college entrants consider when faced with rising costs, and how these factors can guide education policy.