University Pricing

In The Price You Pay For College, Ron Lieber, a journalist with expertise in financial advice, looks at issues around sending a child to college. It is a wide-ranging book full of helpful advice. The advice is mainly for parents confronting the massive financial decision in the US that is their kid’s college attendance. The thing that was most interesting to me was the challenge of university pricing. Specifically, how it compared to the pricing systems used by many firms.

US Education

Being a professor I guess I am biased but my perception of US education is generally positive. What is more, my view of it remains what I thought it would be prior to entering the US. Education in the US is expensive. It is really very expensive. There are ways to make it cheaper if you know what you are doing but this is still a big ticket purchase. You shouldn’t choose a college on a whim. You after all might be paying for it for the rest of your life.

That said, what you get for your money can be really good. The thing I like most is that US education can be flexible which is a real plus compared to the undergraduate education I had in the UK where one had to decide on your future at age 16. (To be clear, I don’t mean US universities are always good. Some of the for-profit ones seem especially dodgy. Low completion rates, for example, are awful for people and need to be tackled.)

I also certainly don’t mean that students all take advantage of what they are offered. Many 18-year-olds, and this was true of me at that age, don’t really know enough to take advantage of what they are offered. Obviously, universities should, and do, work on that. Still, if you know what you are doing my guess is that, at any number of US universities, you can get a great experience. There will be a correlation between price and what you get. You pay a lot but you get a lot. (Compare ‘you get what you pay for’ with what happens in US healthcare. Even ignoring the disgrace that there are people not being covered by insurance, even if you have US health insurance you pay a lot, have a load of administrative hassles, and what you get is still often comically bad).

Paying For College

To return to universities, let us assume you are a parent who recognizes the value of college for your kids. How much will you pay? Probably an awful lot. Georgia has one of the best value systems, especially because of state-level ‘merit aid’, but even schools in Georgia aren’t cheap for everyone. Plus, you still need to feed and clothe the students while they are studying for 4 or more years.

Parents and children face a decision that can, at the most expensive schools, theoretically cost the best part of $50k a year just for tuition. A secret to learn is that full price isn’t paid by everyone. Financial aid, which is basically a discount on tuition cost, can be given for those in need. Given the high prices, those in financial need can still seem relatively wealthy. Even earning a six-figure salary might still qualify you for need-based aid.

Merit Aid

One of the most interesting (and useful) points in the book was Leiber’s comments on the prevalence of merit aid. Universities often have very high list prices but the good news is that quite a lot of people get merit aid. (You will be less likely to get lucky at the most prestigious schools or state schools but it could still happen). Merit aid is somewhat based upon merit, but can often be seen as a simple discount for almost everyone. Giving everyone merit aid just seems more generous than setting a lower price for everyone.

…[the university administrators] want the candidate to feel good about having “earned” a scholarship or grant that represents free money that their families might have to pay….

Lieberman, 2020, page 16

Schools find it hard to show a firm price and ask people to pay that price as everyone likes a bargain. And surely the high list price that few, if any, pay is a sign of quality? Who wouldn’t want a nominally $160k education for $60k rather than a $60k education for $60k?

University Pricing

Does university pricing make the world a better place? Or is overly-generous merit aid merely a subsidy for those who could pay more?

We can think of this as a typical business issue, a pricing problem. (And there are consultants who will help universities with this, you won’t be shocked to know). There are differences from most commercial situations. You often somewhat commit to a school before knowing how much of a discount they will give you — which is something that rarely happens in the wider economy. Still, the basic rules of price discrimination apply.

Price Discrimination

Price discrimination sounds bad — who is in favor of discrimination? But we don’t mean discriminating unfairly, and price discrimination doesn’t need to be socially detrimental. In effect, charging different prices can allow people who can’t pay as much to still gain access to the service.

Imagine you have two people who want to go to university. Both value the experience at $100k, yet one of them can only raise funds to pay $30k. Let us assume that it costs the university $20k to educate a student. (In education, like many industries such as software and airlines there are large fixed costs which complicate things a lot. For this argument I will ignore them). What should the university price at?

They could charge $100k and only educate the wealthy person. This would leave $80k ($100-$20K) free to fund whatever else the university wants to do. They could charge $30k to both which would get two students in, but it would only leave $20k —($30k-$20k)*2– to fund whatever else the university wants to do.

If they are able to give aid (both merit and need-based) they could charge the poorer student $25k after the aid package. They could even give the rich student a $5k merit aid discount, who then pays $95k. This would still leave the university $80k and both students are admitted. Compared to the $100k price set for all, both students are happier. One who got to go to the university who couldn’t have at a firm $100k price and one who got a $5k discount and paid $95k rather than $100k.

Price Discrimination Can Be A Good Thing

What is not to like with price discrimination? Okay, this is a simple example, there can be issues. Still, the point is that price discrimination at universities and elsewhere can be better for everyone.

University pricing is a fascinating topic. It certainly isn’t simple.

For more on universities see here, here, here, and here.

Read: Ron Lieber (2020) The Price You Pay For College, Harper