Let Me Explain the Economics of College Tuition

The Atlantic has discovered that many colleges are soaking the poor by charging high tuition while handing out discounts to students from wealthy families:

Sometimes, colleges (and states) really are just competing to outbid each other on star students. But there are also economic incentives at play, particularly for small, endowment-poor institutions. “After all,” Burd writes, “it’s more profitable for schools to provide four scholarships of $5,000 each to induce affluent students who will be able to pay the balance than it is to provide a single $20,000 grant to one low-income student.” The study notes that, according to the Department of Education’s most recent study, 19 percent of undergrads at four-year colleges received merit aid despite scoring under 700 on the SAT. Their only merit, in some cases, might well have been mom and dad’s bank account.

There’s nothing inherently wrong with handing out tuition breaks to the middle class, or even the rich. The problem is that it seems to be happening at the expense of the poor. At 89 percent of the 479 private colleges Burd examined, students from families earning less than $30,000 a year were charged an average “net price” of more than $10,000 annually — “net price” being the full annual cost of attendance minus all institutional and government aid. Less technically, it’s what students can actually expect to pay. At 60 percent of private colleges, that net price was more than $15,000.

Of course the author of the article is unable to understand why colleges are partaking in such chicanery:

Otherwise, it’s hard to think of a justification for their behavior. Could it be that their prices are worth it, that the educations they provide justify the eye-popping cost? It’s hard to say definitively. But I’m hoping to put that possibility to the test in the coming week by matching Burd’s data against graduation and student loan default rates. In the meantime, the preponderance of evidence seems to suggest that many private colleges are either undercutting the intent of the Pell program, if not abusing it outright.

I’m nothing if not helpful so let me explain what is going on here. The phenomenon noted by the author is really another version of the state’s war against the poor. That is to say colleges, like states, want to raise a herd of dairy cattle that will produce a lot of milk. Doing so requires culling cattle that produce less milk and breeding cattle that produce more milk.

As the article notes many of the students being favored didn’t score notably well on Scholastic Assessment Tests (SAT) or demonstrate any real form of academic exceptionalism. The primary criteria for handing out discounts appears to be parental income. Why would a college prefer to attract students from wealthy families over students who demonstrate academic exceptionalism? Because students from wealthy families provide more milk.

When a college accepts students from wealthy families they stand to get far more than just tuition. Have you ever wondered how college buildings get their names? In many cases college buildings are named after large donors. For example, Parkhurst Hall at the Georgia College is named so because:

Next to Foundation is Parkhurst (2003), an imposing structure that replaces the 1949 Parkhurst Hall that chiefly had been occupied by faculty. The first Parkhurst was built with money from the Sylvester Mumford Fund, established by Mumford’s daughter, Goertner Parkhurst (1850-1949). Sylvester Mumford was a New York merchant who settled near Waynesville, Ga., and built a stately, antebellum home. The beautiful Goertner Mumford cast a romantic figure in the 1870s as she rode her favorite white stallion through the sand hills and pines of the Brantley County estate. Mrs. Goertner Mumford Parkhurst later used her considerable fortune to support the cause of women’s education.

Wealthy families tend to donate money to the college their student(s) went to even after their student(s) graduated. In addition to donations, colleges also gain name recognition by having students from prominent families in their communities (often wealthy families) attend. Name recognition can greatly increase enrollment because many people want to go to a famous college (I’m told it also looks good on a résumé). Not only that but children are often encouraged by their parents to attend whatever college one or or both of them attended. That means a college may enjoy multiple generations worth of students from a wealthy family, thus expanding the amount of time they enjoy the previously mentioned benefits.

What do colleges stand to get when they accept a student from a poor family? Tuition. Somebody is probably saying, “Hey Chris, you dumbass, a student from a poor family will make more money after they graduate college!” As it turns out economic mobility in the United States isn’t very mobile. If you are born into a poor family you are more likely than ever to remain poor. That means a college is less likely to see large donations from students of poor families after they graduate. On top of that, students from poor families are more likely to be, at least somewhat, fiscally conservative. That means even if the student becomes wealthy he or she isn’t as likely to waste that wealth by tossing it to a college they already paid. Because of those two things the college has to milk cattle from poor families as much as possible right away.

In summary colleges favor students from wealthy families because they expect to gain more. The mistake being made by many people is believing colleges are something other than businesses. Colleges aren’t magical egalitarian institutions that are able to rise above self-interest. If that were the case senior college administrators wouldn’t make six-figure salaries, they would forgo a great deal of their salary so that money could be used to educate more students. But they do make six-figure salaries and they know that they need a strong herd of cattle to milk in order to continue making six-figure salaries.