My qualifications: 5 years at a public university, 100% on a combination of student aid, graduated 2005, worked in higher education outreach for quite a while, still working at a public university.
There are a few different kinds of Student Financial Aid:
(1) Scholarships -- a competitive grant awarded to a student for comparatively high score in testing, GPA, essay entry, speech, or a combination thereof.
(2) Grants -- a need-based or participation-based award given without competition. Need-based grants typically have minimum high school performance standards and maximum income per-person household limits. A participation-based grant (like the GI Bill) is based on a fulfilled commitment of service.
(3) Loans -- an amount of money that needs to be paid back. The best are the Federal loans that do not accrue interest while the student is still in school and repayment can be deferred reduced when income is short. Avoid private education loans like the plague if at all possible. Loans, unlike scholarships and grants are pretty easy to get an are considered unlimited.
Knowing the above, it's not general "Student Aid" that contributes to bloat on the university level, it's unlimited access to Federal Student Loans.
I went into my college career in 2000, expecting to pay a total of $14,700 for the whole year. The cost included tuition/fees, transportation expenses, room and board, books, and other expenses. It was fully paid for my scholarships and grants (I was poor and good in school... a jackpot). Tuition and Fees were deducted from the account and I was given a third of my award quarterly. It was my responsibility to use my money wisely.
Between 2000 and 2005, the cost of the very same education ballooned from $14.7k to $25k per year. I paid for my 5th and half of my 4th year entirely with federal loans. Undergrads on the same campus should expect to pay around $35k for this year.
How did prices go so high? Well, there are new buildings on campus, a new Student Union to pay for, dormitory expansions, new faculty and existing faculty getting regular raises, and administration employees making hundreds of thousands of dollars each to manage what is, effectively, a city of 40,000 people 5 days a week. I don't think a mayor of a 40,000 should make so much, but our chancellor makes over $300k/year easily.
In that time, also, there have been major cuts to state higher education funding and other shortfalls in income. There have been bad investments, I'm sure.
So how is it paid for? Well, students and parents alike have been convinced that all kids need a research university education if they are going to make more than $35k per year in an air-conditioned office, so most think they have no choice.
The demand is there. The unlimited access to credit is there. But there is no incentive to keep costs low.
I think that it should be federal law that no one working at a university making more than $75k per year should be allowed to get a raise for 3 years after the last student tuition/fee increase.