When 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.
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.
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