Forbes. September 12, 2013. Tuition increases are constantly in the news these days. Private colleges have become incredibly expensive (as I know personally, with a daughter currently attending one). Public colleges also have been raising tuition sharply in many cases, mostly to offset cuts in the funds they receive from state budgets. Yet, by the standards of the economic marketplace most colleges are still underpriced.
Harvard University accepted only 5.8 percent of over 35,000 applicants this year. Stanford only admitted 5.7 percent of their nearly 39,000 applicants. The University of Southern California only accepted 19.7 percent of their over 47,000 applicants, while Georgetown University let in 16.6 percent of their 20,000.
In most businesses, when you have such overwhelming demand for your product, you raise the price (and increase production). Many colleges, especially private ones, do not want to increase the size of their student bodies, but why would they not increase prices when they have so many prospective students desperate to attend?
Further, the prices that people focus on are not the prices that most students and their families actually pay. Most of the reporting, aiming for the sensational, reports the tuition or even the full cost of attendance, which is tuition, room, board, books, and miscellaneous living expenses. Yet, most students receive financial aid in some form, so the price they pay is not the full price.
For example, Harvard’s full price is $59,800 but the average price paid by students and their families who qualify for financial aid is only $15,550. That much lower number probably does not exactly strike fear in people’s hearts or make one think that we have a college cost crisis. At University of Southern California, full price is $60,000 but the average student only pays $27,500, a figure that includes the students who are paying full price. The situation looks much better when the actual cost is examined instead of the number in the news.
When President Obama and other critics of college costs complain about sky-high tuition, they are either misleading people or do not understand the difference between the full list price and the average net price. After all, the only people paying the high prices for colleges are the “rich” people who the very same critics believe in taxing so highly.
Colleges are simply doing the exact same thing as government—charging rich people more than those with less ability to pay. Certainly the government should appreciate the fact that colleges are following a progressive pricing model modeled after progressive income taxes.
Importantly, studies of the economic returns to college education continue to show that college as an investment is well worth it. The earnings incrementthat comes to college graduates plus the much lower unemployment rate for college graduates combine to make college worth it even at today’s high prices. In other words, colleges are still charging much less than the value of their product.
All of the above does not mean that everything is perfect or that students and families should not make informed choices about what college to attend and how to pay for it.
Students who expect to pursue careers that are not high paying would likely be better served by attending lower-priced public colleges. Students who would need to incur large student loans to attend a private college should carefully consider public education options.
Students also should consider working to help pay for college as a much preferred option to student loans. Research has found little to no negative impact on student academic accomplishment from working while going to school when the students work twenty hours per week or fewer.
Critics, just like students, need to remember that the public option is out there. Community colleges and technical schools are still incredibly affordable. Most states have a broad selection of community colleges, technical schools, and then other increasingly expensive state colleges and universities that tend to increase in quality as the price of tuition increases. Yet, for in-state residents, even the most expensive public university is generally quite affordable with a total cost often around $20,000 per year even at full price.
An increasingly popular option is for a student to attend a lower-priced state or community college for the first year or two to save money then transfer to a more prestigious public or private university for the remainder of her studies.
Now that we see that not all colleges are expensive and expensive colleges are not expensive for all students, let’s look at the government’s impact on college costs. Over the past forty to forty-five years federal aid for college education has been steadily ramping up, with larger grants and more access to student loans. Yet, colleges offer financial aid by computing the student and family’s ability to pay, then offering as much financial aid as the college can afford to fill the gap between their full cost and what the family can afford.
If the federal government offers more financial aid, colleges can offer less while keeping the total financial aid package the same size. That is, federal aid simply reduces the amount of aid a family qualifies for from their college. There is no savings to students and their families. It is a classic case of the Law of Unintended Consequences.
Particularly at public colleges, where many students get little financial aid directly from the college, more generous federal aid (in the form of Pell Grants and student loans, for example) gives the colleges a chance to raise tuition while keeping the net price to students the same. Either way, more federal aid ends up bringing colleges more money rather than yielding savings for students and their families.
Unless the federal government changes the formula used for computing college financial aid packages, more federal aid will continue to do nothing to help students. Either tuition will go up or the colleges’ financial aid offers will go down in order to offset the increase in federal aid. All the federal government will accomplish is to make the students and families believe the government cares. Perhaps that is what the federal government is trying to do.
As long as affordable options are out there, why should we be concerned if there are also expensive choices? Nobody thinks that cars are unaffordable because Mercedes has a model that costs $100,000. College is not unaffordable because Harvard, Stanford, and other top schools are expensive. Students have plenty of other college options. Just as not everybody can buy a Mercedes, students should choose a college that they both love and can afford.