A report from the Federal Reserve Bank of New York suggests that federal student aid programs are doing more harm than good. When subsidized federal loans have the effect of "relaxing students' funding constraints," universities respond by raising tuition to collect the newly available cash.
The resultant tuition hikes can be substantial: The researchers found that each additional dollar of Pell Grant or subsidized student loan money translates to a tuition jump of 55 or 65 cents, respectively. Of course, the higher tuition also applies to students who don't receive federal aid, making college less affordable across the board.
The report also found that subsidized federal loans do not appear to increase enrollment. "[W]hile one would expect a student aid expansion to benefit recipients," the study authors wrote, "the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect."