College Costs: Ruinous Competition

July 16, 2010

The public debate around college costs is how they keep rising, even faster than the rate
of inflation.  That’s true, but it puts the focus on the sticker price when it should be on the ‘net price,’ the price students and their families actually pay after financial aid.  While some of the financial aid comes from state and federal sources, more of it comes from the institutions themselves.  And while some of this aid is drawn from endowments restricted for that purpose, much more of this aid comes in the form of a discount on the sticker price.  From where I sit, colleges are discounting more and more to enroll students.  (Of course I know liberal arts colleges better than other kinds of institutions.)

Case in point:

A few weeks ago a couple of liberal arts college presidents received an e-mail raising the possibility of a session at next January’s Council of Independent College’s presidents’ conference. “Thematically the idea is something along this line: admissions costs have been increasing rapidly; might there be anything that could be done collaboratively to rein in costs? The concept would be to have several presidents plus a couple of admissions
marketing folk [consultants], and some method of audience participation or
break out group brainstorming.”

A colleague responds “The admissions “cost” that creates the most pressure is, of course, the discount competition. I think we have enough admissions overlap and exist in sufficiently similar markets that in a very real sense we are creating the pressure, and
collectively driving up discount, ourselves. In addition, it is worth asking whether we, [in the Midwest], are contributing to the national increase in discount because we work in one of the most heavily discounted regional markets. The “mid-western discount” used to be charming; now it is a threat. Of course, I suspect any collective action would
be seen as anti-trust.”

I wholly agree with this colleague’s view and add “I think the issue is worth a discussion from those premises: not how we do joint marketing, but can we have a less ruinous, less
beggar-thy-neighbor, admissions marketplace.” Increasingly, colleges are
offering more “merit aid” to affluent students rather than need-based aid to
students with demonstrated need.  I put merit aid in quotation marks because the grounds for merit are increasingly specious.  Colleges are simply offering “merit aid” (discounting to affluent students) to capture the rest of the tuition income
their parents will pay.

I’m reminded of a paper that Winston and Zimmerman, two Williams
College economists, wrote in 2000:

Where is Aggressive Price Competition Taking Higher Education?

G.C. Winston and D.J. Zimmerman (Williams College)

Abstract: It is increasingly clear that price competition is
escalating in the market for higher education. We attempt to understand how
price competition would work in higher education and explore the likely long
run equilibrium structure of prices in that context. We draw inferences using
both microeconomic theory and historical parallels found in the market for
graduate education. Our analysis suggests that negative prices are likely to
prevail at the wealthiest colleges and universities. Using data from IPEDS we
estimate the resulting distribution of prices and school quality. While price
competition may increase attendance by low income students at the wealthiest colleges and
universities, it is unclear how they will fare at schools with middling wealth
and resources. Further, schools with less accumulated wealth will be
particularly vulnerable to any ensuing price competition. While our conclusions
must be interpreted with caution, they do suggest some cause for alarm.

This week I learned there will be a session at CIC on “Sustaining Access and Revenue: Molding Collaborative Approaches to Scholarship and Aid Policy to Serve More Students Better.”  “The workshop will explore avenues by which private colleges might move forward on collaborative strategies to restrain tuition
increases and increase commitments to need-based aid. Many presidents of CIC
colleges feel trapped by the present system of “buying” the incoming class of
students at the expense of serving those most in need.”

I’ll likely go to the session, but as a skeptic.  There’s a real problem here: the escalating use of merit aid.  But genuinely collaborative efforts to rein in that practice would violate anti-trust laws.

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About Doug Bennett

Doug Bennett is Emeritus President and Professor of Politics at Earlham College. He has a wife, Ellen, and two sons, Tommy (born 1984) and Robbie (born 2003).
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