Why Do Colleges Cost So Little?

Parents Forum
1

<p>That's meant as a serious question, though only for "prestige" private institutions. Many private colleges - or at least the LACs - estimate the actual cost per year of providing education at between $60k an $75k per student - meaning every student receives a "scholarship" worth approximately $20k+ per year.</p>

<p>Not that price particularly has to mirror costs. Undergraduate education at a place like Harvard likely costs much, much less per student than at, say, Williams, yet they are priced the same. Demand is such that either could easily charge more, and the evidence suggests that every time they increase the list price, the number of applications goes up. If they substantially increased the full-pay price (as they are, but more slowly), they could more easily subsidize low-income students (if they chose - I suspect they don't really want to), or use the funds for other purposes. Since aid would continue to be need-based, it wouldn't make any difference to anyone except the full-pay customers who would get down on their knees and plead with the schools to take their money. Every major college that has majorly changed their pricing structure (such as NYU and Georgetown) has seen demand soar (along with "prestige".) URichmond is now involved in the same experiment.</p>

<p>So why do they continue to price their product so low? Is their demand management so poorly developed? Do they know less than we think they know? Do they lie about actual costs? What is driving down the price?</p>

2

<p>Sign me up! I like it. "Pay more for nothing more." This fits right in with my "buy high, sell low" investment philosphy.</p>

<p>I know you are serious and while you were traveling I made the argument about true full costs would allow greater need aid in a merit aid thread . I think I further suggested that if people objected morally to merit aid , they (full payors) could make up the diiference in what they actually paid and true costs voluntarily . I also speculated it wouldn't be a large line.</p>

3

<p>All true, which is why I really don't understand why operations with such tremendous pricing power would choose to so radically underprice their product. Using my analogy from another forum, a country club gains immensely in prestige (and "peer recognition") by becoming more exclusive, and charging more for their privileges. I don't see why the model doesn't hold.</p>

4

<p>Oh dear. Where does one begin on this question?</p>

<ul>
<li><p>COSTS. While it may be good marketing, not to mention simplistic math, it is not at all clear that the so called "cost" of some expensive private colleges is anywhere near as high as quoted in the marketing and fundraising brochures. Colleges (most!) are nonprofits, so not obligated to keep their books in the same way that for profit companies do, so they have a bit more flexibility in how they classify expenditures. For instance, many nonprofits are now obligated to break out program expenditures from overhead (such as fundraising) so we can see how much of our donated $ are actually doing useful work. Most of the college marketing materials don't do this. Indeed, it can be devilishly difficult to find good data on the cost of instruction at most colleges.</p></li>
<li><p>colleges operate in a political fishbowl. Imagine being the first college to jack up costs waaay beyond peers. </p></li>
<li><p>who's to say colleges actually WANT more low income students. Having too many would do a great job of destroying the perception of a luxury good.</p></li>
</ul>

5

<p>Some of us full payors do exactly this by donating each year to the schools our children attend.</p>

6

<p>I agree with everything you wrote. (and it is very clear from Gordon Winston's studies that there are plenty of highly qualified low-income students around if these colleges really wanted them, which indicates that they really don't.)</p>

<p>And, agreed, "costs" may be juggled, but in a supply/demand economy for prestige goods and services, costs are much ado about very little. And some colleges have demonstrated that by jacking up their prices rapidly, demand soars.</p>

<p>So I really just don't get it.</p>

<p>"Some of us full payors do exactly this by donating each year to the schools our children attend."</p>

<p>And I think that's great, but I don't see why you should feel a need to do so, when they could just as easily get the funds out of families who would beg for the opportunity to pay it.</p>

7

<p>First rule of cost. It does not equal value. A gold-plated bathtub is no more functional than a standard one. Do those uber-expensive gothic buildings really add much to the educational quality? In an era of surplus PhDs, is the guy being paid $90,000 for teaching 3 classes really much worse as a teacher than the guy getting $180,000 for two? Is a class of 10 really more effective than one of 30?? Are 15,000,000 volume libraries much more useful to most students than 1,000,000?</p>

<p>Yes there are some that must have the most expensive of everything--but really, so what? So what if Harvard charged $200,000 a year--what would be the real result--would employers prefer to hire them more? Would society confer more status to them? Or would it just be lumped with the wretched excess that are certain homes, watches, and cars etc. that just look gaudy and dumb.</p>

8

<p>mini,</p>

<p>Market pricing implies setting a price where demand and supply balance, at that price. But this does not work in luxury markets, as scarcity of supply is essential for the luxury image. This is practiced by purveyors of other kinds of luxury goods, I might add. Supply exceeds demand, so perceived value goes up. Couple that with a good PR campaign (sorry, should have said alumni donation campaign) about costs being so much greater, and demand goes up another notch.</p>

<p>Lets add another element, substitution. As long as all the elites are rather equal in cost, one can have clear preferences. There's no economic cost, at least. But, if say Yale breaks ranks, doubles tuition but increases financial aid dramatically, I think you will find some candidate full pay applicants conclude that going to momma's legacy college, Pton, may not be such a bad decision instead of daddy's, Yale. Right now, no one needs to make such decisons. Antitrust keeps the elites from colluding on such things. Remember they got slammed a few years back for financial aid collusion.</p>

<p>Now, let's assume that the PR about costs is correct (although I don't think it is). If you were to argue that that $20K subsidy per student (because costs exceed charges) is unfair to poor kids, or overly generous to the wealthy. OK. What about public higher ed? (heck, what about national park admission costs?)</p>

9

<p>"First rule of cost. It does not equal value."</p>

<p>No argument about value to me. Value is in the eye of the beholder. I don't own a Jaguar, and I buy used vehicles, not "pre-owned" ones. But the market says there is "value" in "prestige". The question to me is why the purveyors don't take full advantage of it.</p>

<p>"If you were to argue that that $20K subsidy per student (because costs exceed charges) is unfair to poor kids, or overly generous to the wealthy."</p>

<p>No arguments about "fairness" from me. These are private institutions, and can do what they please (as long as it isn't on my dime). What I'm trying to figure out is why the act in economically irrational ways.</p>

<p>" But, if say Yale breaks ranks, doubles tuition but increases financial aid dramatically, I think you will find some candidate full pay applicants conclude that going to momma's legacy college, Pton, may not be such a bad decision instead of daddy's, Yale. Right now, no one needs to make such decisons."</p>

<p>Perhaps. I think it is just as likely (and as experience at NYU and Georgetown suggests) just the opposite would happen. Being more "elite" would increase the number of full-pay applicants, and make it even more desirable for those requiring financial aid. The percentage of those receiving aid would go up. Yale would look more "diverse". It would be the most prestigious of the elite country clubs.</p>

<p>The point is I would think they have some economic modeling out there that justifies their irrational economic behavior in keeping prices so low (and they are being less than truthful in their alumni appeals.) But I haven't a clue as to what it is, which is why I asked the question. I think they recognize that the price is too low, because every time they raise it above the rate of inflation, they see an increase in applicants. I expect that will continue. But the price of these colleges is still rising more slowly than the income/assets of their full-pay customers, which really makes no sense.</p>

10

<p>mini, I think you're giving way too much weight to Georgetown and NYU. In fact, one might argue that they rose in prestige IN SPITE of their cost increases.</p>

<p>And, it is interesting to note that BC is just as expensive as Gtown, but no where near as prestigious. How does that fit in to your model?</p>

<p>In short, pretty speculative, with little supporting evidence.</p>

11

<p>For one thing, as non-profits I believe they have to show some public benefit or risk having all that endowment and tuition income subject to taxes.</p>

12

<p>The median income for a fully employed male is $41,670 per year or thereabouts. </p>

<p>I think it is just swell that an annual median salary and a year at podunk private U (or fancy schmantzy private U) are the same, more or less. Well, the year at fancy schmantzy is actually more.</p>

<p>Of course, the private college price is too low! Perhaps it should be double a median income!</p>

13

<p>Well, I think the key point is that as tuition has risen, the number of applications has risen in tandem, and tuition increases have been significantly lower than the increase in income/assets of full-pay customers, so from a "prestige good" perspective, it doesn't make much sense to me - I can't think of an economic model that can explain it.</p>

<p>As for non-full-pay customers, they are "red herrings" - there is no necessary relationship between list price and the amount they actually pay now, or would under a different pricing scenario. The median family income gives you a full-need-based ride at any of these institutions, if they deign to admit you (but for the most part, they won't, as Gordon Winston's work indicates.)</p>

<p>"For one thing, as non-profits I believe they have to show some public benefit or risk having all that endowment and tuition income subject to taxes."</p>

<p>Public benefit? Need-based aid for everyone who can't pay $70k - no different than now (at $45k).</p>

<p>"I know Wellesley College has a per student operating cost of something like $65,000. The balance is paid by the (huge) endowment."</p>

<p>Why are they wasting their money when they don't have to?</p>

14

<p>I know Wellesley College has a per student operating cost of something like $65,000. The balance is paid by the (huge) endowment.</p>

15

<p>"Well, I think the key point is that as tuition has risen, the number of applications has risen in tandem, and tuition increases have been significantly lower than the increase in income/assets of full-pay customers, so from a "prestige good" perspective, it doesn't make much sense to me - I can't think of an economic model that can explain it."</p>

<p>What percentage are full pay? Not so high.</p>

<p>Applications have risen across the board. What's not to understand that?</p>

<p>Incomes have risen disproportionately among the wealthiest few percent of our population, and they increasingly seek luxury goods, so they apply to elites disproportionately (may or may not be true). So what? Many applicants to elites are not even remotely qualified.</p>

<p>mini,</p>

<p>You obviosly have a "theme" you're after. You also have not responded to many points raised by others.</p>

<p>Methinks this is not a discussion. I'll bow out.</p>

16

<p>
[quote]
why operations with such tremendous pricing power would choose to so radically underprice their product

[/quote]
</p>

<p>I agree with nmd--mini is being silly and facetious.</p>

<p>No single institution has "tremendous pricing power" to unilaterally raise tuition by a huge amount.</p>

<p>If Williams raised its full-pay tuition to 70K it would lose a disproportioniate number of its affluent applicants who would find that Amherst, Swarthmore, Haverford, Dartmouth, Pomona, etc. were quite adequate substitutes.</p>

<p>And the notion that the prestige associated with expensive colleges would go up if colleges raised their list prices is silly as well.</p>

<p>If Jaguar raised their list price but started giving "need-based discounts" to half their customers, driving a Jaguar would no longer be a clear signal that you were rich.</p>

<p>EDIT: To further refute mini's thesis that list price = prestige, the most prestigious academic summer programs for high school students are free: RSI and TASP.</p>

17

<p>(1) A long time ago I participated in a prestigious university's budget process. There was no fancy modelling. Tuition was set by a combination of looking around at what everyone else was doing and plugging the last gap in the budget numbers.</p>

<p>(2) Assuming that prestigious universities are profit-maximizing, at least in an economic sense: Of course it makes sense for them to price-discriminate. All monopolists would like to do that, and they are essentially monopolists (they restrict output, etc.). On the low end, they award financial aid. On the high end, they do fundraising. Not completely efficient, but not bad.</p>

<p>In theory, they could make the tuition system self-sustaining by raising base tuition and awarding more financial aid to redistribute the excess. But that might harm fundraising from non-current student families -- an extremely important source of revenue and capital to the university. I assume it's more effective to say "Help us fund the excess cost of providing today's students the benefits we gave you!" than to say "We've got the costs covered, but we'd like your money anyway just to salt away."</p>

18

<p>Also you can't buy your way into the most desirable country club in the US. You have to be asked to join Augusta.</p>

19

<p>"No single institution has "tremendous pricing power" to unilaterally raise tuition by a huge amount.</p>

<p>If Williams raised its full-pay tuition to 70K it would lose a disproportioniate number of its affluent applicants who would find that Amherst, Swarthmore, Haverford, Dartmouth, Pomona, etc. were quite adequate substitutes."</p>

<p>Oh, they wouldn't do it unilaterally, of course. It would be like airline pricing. No collusion. Simply matching. Just as they do now. In fact, at the current rate of increase, which outstrips inflation by some distance, but is less than the increase in income/assets of the full-pay customers, the scenario I painted is precisely what is happening now. And Princeton has pretty much proven it works. Now the parents of all those folks attending with $140k incomes can boast that not only is sonny-boy attending Princeton, he is getting a scholarship!!! Princeton can boast they have become more "economically diverse", and have "numbers (i.e. those receiving need-based aid) to prove it". Meanwhile, the amount of income they get overall goes up rather than down. It's a good play all around.</p>

<p>"In theory, they could make the tuition system self-sustaining by raising base tuition and awarding more financial aid to redistribute the excess. But that might harm fundraising from non-current student families -- an extremely important source of revenue and capital to the university."</p>

<p>But it isn't a theory: it is something they are moving toward now.</p>

<p>As to the Jaguars, I think you've explained the reason why these schools strive hard to keep down the number of low-income attendees. They could have many more if they chose (as Gordon Winston has proven), but it would hurt much in the prestige category, so it is a place they don't want to go. And make no mistake: prestige is their most important asset.</p>

<p>Meanwhile, no one has addressed my question: "why do (these) colleges cost so little"? Is it just, as JHS seems to suggest, institutional inertia, with no economic modelling behind it at all?</p>

20

<p>As Boys Town found out some years ago, a non-profit that accumulates too much wealth for the amount of public good it does will be scrutinized by the IRS. Giving out some scholies while sitting on a growing multi-billion$$ endowment will raise questions from the IRS and Nobody wants that. Ask Father Flanigan.</p>