PERFECT PRICE DISCRIMINATION. USA Today has been investigating the truth behind rising college tuitions. The truth is, nobody knows. One university president, not in the running for the deck of cards, tells tales out of school:
King Alexander, president of Murray State University in Kentucky, wants the world to know how many universities set tuition prices. It works like this:

1. The university raises its official tuition price.

2. The higher tuition qualifies many students for bigger federal and state grants, which are passed on to the school.

3. The university writes a "scholarship" to cover the rest of the tuition hike, so many students don't actually pay more.

"It is a shell game, pure and simple," Alexander says. "A lot of schools set tuition prices to maximize grant money and then use institutional (financial) aid -- which isn't real money -- to set the real tuition."

Alexander estimates that 28% of the 10,000 students at his public university in Murray, Ky., would get more aid if it raised its official tuition price and then gave scholarships as discounts.

Surprise. What the government subsidizes, it gets more of. If it subsidizes "not charging list price," Nobody. Pays. List. Price.

Cui bono?
For most students, it's a lot cheaper to go to a four-year public university today than it was just six years ago.

Congress and state legislatures have flooded middle-class families with tax breaks and grants that pushed financial aid -- excluding loans -- to a record $49 billion in 2003. That's $22 billion more than in 1998. Result: The actual amount paid in tuition and fees at four-year public universities fell 32% from 1998 through 2003. At private colleges, aid limited tuition increases to about 1% a year during the period.

The misconception that college is becoming less affordable starts with a misunderstood number: tuition price.

The published cost is like the most expensive seat on an airline: Few people pay full price. Still, the sticker price is crucial to the complex, secretive pricing strategies in higher education.

Federal Pell grants, the nation's biggest financial aid program for college students, distribute $12 billion annually based on a formula that increases grants when tuition is higher. Many state grant programs also do this.

There are encouraging signs, however:
But that's not the only reason advertised tuition prices are on the rise.

High tuition carries prestige, especially at top schools, and huge scholarships are a powerful tool to attract students. Private schools have used this strategy for years.

"The private-school model is based on 'perceived value,' and high tuition makes people think a school has a lot to offer," says James Garland, president of Miami University in Oxford, Ohio.

Miami University, a well-regarded public school, will move to the private-school tuition model this fall: a high list price and big scholarships. The university raised in-state tuition to match out-of-state tuition, $19,718. It then will give students from Ohio automatic scholarships of $5,000 to $6,200 to make up the difference.

Why not just charge less for tuition? Garland says the high price makes students realize the value of their education. Despite the tuition hike -- or perhaps because of it -- the university received a record 15,000 applications for 3,500 spots in the next freshman class.

I'm not sure about this "perceived value" argument, especially in light of accumulating evidence that the premium to a university degree is not that sensitive to the status of the school, particularly over longer time intervals, say 20 to 25 years. And is there any difference between charging out-of-state applicants $19,718, in-state applicants $14,718, and offering some applicants grants or work-study opportunities of up to $1200? I'm skeptical about too many people staying too stupid for too long. Either way, you're engaging in something approximating perfect price discrimination.
Garland says the private-school model lets colleges charge wealthier students more and use the money for extra aid to low-income students.

The nation's most selective schools always have been aggressive about raising published prices to maximize what they receive from wealthy students.

The concluding paragraph of the article discovers something that has been around for a while.
Mark Yudof, chancellor of the University of Texas system, says legislators now prefer that higher-education subsidies go to students and families rather than directly to universities. He says government support for higher education is being refashioned into a national voucher system: Students have generous government education benefits that can be spent at any school.

"We're subsidizing college education today through the tax system and grants, rather than through aid to universities," Yudof says. "Higher education has been converted into an entitlement program for the middle class."

An accompanying article raises the equity question that follows such a policy.
Merit aid is unpopular among some academics who study tuition costs. They say rewarding the best students, who tend to be affluent, diverts aid from the needy.

On the other hand, encouraging students to "work their butts off," as another person quoted in the story puts it, is worth doing.

This article is rather breathless about the findings, noting
"College still takes a big chunk out of most families' income. But the average student is much better off today than headlines would have you believe," says Sandy Baum, an economist who co-authors an annual report on college costs for the College Board, which oversees college entrance exams.

USA TODAY analyzed what students paid for tuition and fees after grants, discounts, tax credits and deductions. Other studies focus on the listed price of tuition. But listed college tuition is like the sticker price on a new car: Few people actually pay it. In 2003, students paid an average of just 27% of the official tuition price at four-year public universities when grants and tax breaks are counted. Students at private universities paid an average of 57%.

We have known for some years that government financial aid for college has been an upper-middle-class subsidy. No surprise here, notwithstanding this.
The most affluent taxpayers -- 1.5% of returns are for incomes above $200,000 -- do not qualify for tax breaks, but many benefited from big increases in grants that reward academic performance. Schools have increased merit aid to recruit the best students, who tend to be affluent. And since 1993, 14 states have started merit-based scholarships to reward students who achieve good grades in high school.

The poor have benefited from increases in federal Pell grants from $6 billion to $12 billion since 1998.

But the biggest beneficiaries have been middle-class families earning $40,000 to $100,000 a year. They get the most tax benefits and often qualify for financial aid based on both need and merit.


RUNNING EXTRA: The Sports Economist observes,
What is missing from Stephen's otherwise excellent commentary is the positive incentive effect that this has on university administrators. They're being taken off the dole, and are now forced to compete. More than before, at any rate.

True, up to a point. There still is an element of third-party payment moral hazard at work. To the extent that vouchers make potential students or their parents less price-sensitive, the administrators are free to exercise more market power. We also have to know what preferences the students are acting on. These vouchers might be subsidizing Jacuzzi U and other creature comforts -- not a new problem -- rather than additional computer connections, journals, or smaller classes.

For an even more skeptical take than mine, go Over the Rainbough.
I suspect all this other new government aid will have the same impact on universities nation wide. The government has demonstrated that when the price of tuition goes up the they will give out more money, and the average financial burden on individual students will go down. Why not take this to it's logical end. First we will have every student needing and/or using some financial aid to pay for college tuition. Next the average student will only pay for half of their college tuition. Soon after this will become the case for all students. Eventually the average student will pay nothing for college, and will rely entirely on financial aid, and finally this will expand to every student. A college education will be "free" to every student in America. Meanwhile the quality will not have increased a bit and the cost per student of college tuition will be many times what it is today.

By redistributing the cost onto those not attending they create the perception that the cost of tuition hasn't really changed at all. Consequently no one notices when we do not get an increase in quality in return for the rising expense of tuition. I can tell you one thing; if the quality of education in Georgia has gone up since the inception of the HOPE scholarship it is in spite of it, not because of it. HOPE has created a perverse incentive structure, where students are encouraged to take easier classes, and professors are encouraged to make their classes too difficult to pass (students drop the classes they have already paid for rather than risk lowering their grades and losing HOPE, then have to take another class instead).

So yes college tuition is "soaring out of control," but most students are being paid not to notice. Soon mediocrity will be free for everyone courtesy of Uncle Sam.

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