Welcome to Robin Hood University

RHood.jpgWhen I attended Northwestern beginning in the late 1950s, most students paid exactly the same tuition, room and board fees. Today, only a minority of college students pay full tuition (“the sticker price”) from their own funds. At exclusive private schools, some students pay nothing for tuition, room and board, but others pay $50,000 or more. The variations in the amount students pay from the sticker price is undoubtedly much greater than a generation or two ago, although no one even tries to calculate that statistic.

At Harvard, the practice even became institutionalized, with low income students (e.g., family incomes below $60,000 a year) paying nothing, and those above that  paying 10 percent of their income up to $180,000, with many still more affluent students paying the full fees. Harvard, in effect, imposed its own private income tax of 10 percent over a wide income range.

Why are universities engaging in vigorous price discrimination, much more than in earlier generations? No doubt the most important factor is that attending college is one of the very few things in life that is substantially less affordable than a half century ago. Take the university at which I teach, Ohio University (OU), a typical state school. In 1964, the $450 annual tuition amounted to 6.25 percent the median family income in the Buckeye State. By 2012, the tuition of $10,204 was almost 17 percent of median family income.  If the burden of going to OU in 2012 had remained what it was in 1964 (6.25 percent of median family income), the tuition fee would have been $3,756 -over 60 percent less. When tuition fees are really low, the need to offer tuition discounts in the form of “scholarships” is dramatically reduced.

A superb January 13th Wall Street Journal analysis by Douglas Belkin reveals that Robin Hood finance (robbing the rich to help the poor) grew particularly virulently between the 2004-5 and 2012-13 academic years at a dozen flagship state universities examined,  with subsides to lower income students from higher income ones growing an astounding 13.4 percent a year.  Effectively, fees increased a lot for upper income kids, but did not for their poorer peers.

Two questions arise. Is this good? Is it sustainable?  To the first question, most academics would enthusiastically answer “yes,” but I am far more skeptical. On fairness and egalitarian grounds, there are strong arguments to minimizing financial impediments for low income persons going to college. But is it the job of unelected university trustees and presidents to redistribute income, or does that more appropriately belong to the formal political process? What is the function of progressive taxation and various government in-kind subsidies for food, housing and medicine for the poor? In order to engage in their redistributionist policies, colleges become privy to all sorts of family financial information that, in my judgment, is none of their business. Moreover, there is some evidence they use this information to punish responsible financial behavior, by such pathologies as giving lower tuition discounts to families that save and live modestly as opposed to ones that borrow prodigiously to finance high levels of personal consumption.

Will Robin Hood finance continue to grow robustly? I think not, for two reasons. First, as costs of college attendance has soared (especially for the affluent) and benefits stagnated, the growth in demand for college has declined abruptly, making large tuition increases unlikely in the next few years. The college bubble is bursting. Secondly, some schools are getting smart and taking advantage of opportunities massive price discrimination offer.  Some schools, especially private ones, with high sticker prices (say $45,000 a year) but big tuition discounting) are going to try to attract upper income students by lowering sticker prices drastically (say to $30,000 a year), by essentially slashing need-based scholarship assistance. Sewanee pioneered this a few years ago, and others (Ashland University) are following.

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Richard Vedder directs the Center for College Affordability and Productivity, teaches economics at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.

(Photo Credit: Warner Bros Pictures.)

4 thoughts on “Welcome to Robin Hood University”

  1. This “Robin Hood” tuition structure reflects the political values of the professoriat and the administrasoriat. It’s what the tax code would look like too, if those guys had their way–including a hefty tax on assets.
    The penalty on thrift is especially galling. If you make $150k but you’ve spent it all, your private college tuition will be, as Vedder observes, a pretty reasonable $15k. But if you’ve saved up what you should have, by your mid-fifties, to prepare you for a comfortable retirement, then you’re expected to pay full fare, cleaning out a good chunk of those retirement savings.

  2. I think there are both efficiency and equity arguments lurking in the discount question, and that these ought to be disentangled. Not that disentangling will produce an answer, but it might clarify the questions.
    Higher Education surely has a progressive impulse, and some of discounting is all about equity: providing more to those who need it, whether the need is to equalize incomes, address class injustices or overcome past racial discrimination. When this is done, it is possible (though not of course inevitable) that the net effect on the institution will be negative–less education “produced”, less value-added imparted, few alums able and willing to support the institution in the future.
    Looked at this way, the university is doing its bit to fund externalities it is not obliged to fund, much as some green architecture goes beyond attempting to capture long term internal efficiencies and is aimed at playing a collaborative role, voluntarily, in an enterprise that has collective consequences.
    I think that’s your Robin Hood argument. And on that, I take your point that such things are typically better left to government. Of course, that’s why we have government–way imperfect as it is.
    On the other hand, as to your argument that Robin Hood behavior entails doing things that are “none of the business” of institutions . . . well, especially if they are private institutions, why is that *your* business? Scads of institutions–the entire nonprofit sector, for that matter–bear the existential weight of how to operate in the public interest. We just don’t live in a world where there is a bright line between self-interested profit-maximizing entities on the one hand and a corrective government on the other.
    But there’s an efficiency side to equalization, too. True, there is no clear answer as to what is the perfectly optimizing student population for a rational institution. Is it all about individual merit? Forming a class whose dynamic results in the highest possible levels of learning? But there seems little question in my mind that going back to full freight will result in students with more money and lesser talents (however defined) getting in, while stranding more talented students outside the gates. The result will be negative from an internal, institutional POV.
    In other words, we could afford full freight when costs were manageable, as you point out they were back in the good old days. But they are now out of control.
    I like that some places are toying with reducing or eliminating discount. For some institutions at some times in certain market niches this will be a rational strategy from an efficiency POV–they will shuck the discount rat race and potentially improve student quality, demographics, reputation, etc. But just pining for the good old days as an across the board proposition, in this day and age of ridiculous tuitions, will not always be smart from an internal, efficiency viewpoint.

  3. The situation is very capricious. It is not simply the high earners who get hit with huge tuition bills. It is hardest on students whose parents are in the 60-100,000 bracket who are borrowing money to pay the full tuition plus room and board. In many schools this means working far too many hours to fully take advantage of the education they are paying for.
    There is something hypocritical about schools with the mission of “social justice” congratulating themselves for educating an under-served population by financing the mission through turning tenure track positions into underpaid adjunct jobs, lobbying the state and federal government to grant ever increasing loans to feed tuition increases that are twice the rate of inflation, and contracting out food service to outside companies that can pay minimum wage without it reflecting on the social conscience of the institution.
    Politicians who promote the notion that everyone needs and deserves a college education do students a great disservice. It creates an inelastic demand for education that is exploited by everyone from the entertainment industry (think athletics), the publishing companies and the companies that sell calculators and computers as well as software for services that aren’t really needed.
    The one trillion dollar debt of students is unsustainable. That is a disgrace but the biggest disgrace may be that half of it went to pay for stuff that students never needed in the first place.

  4. This is decidedly not Robin Hood. Universities just find they can pursue their goals while garnering more income by price discriminating. The fact of price discrimination alone tells all: Competition is not intense, hampered by the accreditors. And that, together with federal largesse in loan standards, explains all else. Burn it down; start over.

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