Higher Education

Rising costs brings new focus on how exactly colleges set their prices

With tuition up, the real reason college costs what it does is under unaccustomed scrutiny

ATLANTA — When Reza Sabooni was accepted to Emory University, the advertised price was an intimidating $63,058 a year.

A determined negotiator who is now a sophomore majoring in business, Sabooni ended up paying much less than that. The university at first agreed to cover only half of the cost, but ended up taking care of two-thirds through discounts and financial aid — though Sabooni still has had to borrow some $20,000 a year in loans.

The experience, he said, “was stressful.”

It’s not surprising that Sabooni doesn’t pay the “sticker price.” Few people do. The actual average “net price” Emory students paid in 2013-14 was $28,203, federal figures show. That’s because the way colleges and universities decide what to charge, and what they actually cost, is part of a complex and largely unseen system now coming under scrutiny.

The process by which these institutions price themselves involves a battle for status, a tangled labyrinth of subsidies, and delicately balanced financial-aid budgets that are often leveraged as much for prestige as to help the neediest applicants.

Related: Think tuition is rising fast? Try room and board

Meanwhile, the cost of a higher education has more than doubled, when adjusted for inflation, since 1986 — faster than the cost of health care, and well ahead of the median family income.

Now presidential candidates are promising to tackle this issue, and an initiative is under way to come up with a standard determination of what families should be expected to pay — what, in other words, “affordable” actually means.

All of this has started focusing attention on why exactly college costs what it does.

Like car dealers, colleges and universities advertise one price, but charge most customers another. Like cable TV companies, they bundle services that students have to pay for whether they use them or not. And unlike purveyors of other commodities, they require customers to disclose their wealth and income before telling them the ultimate tab they’ll have to pay.

“With no other product or service do you go in and fill out a form saying how much money you make, how much debt you have, whether you have a mortgage on your house, how many other children you have going to college,” said Richard Vedder, an economist and the director of the Center for College Affordability and Productivity. “If an auto dealer tried to get that information, they’d probably be hauled to court and accused of trying to engage in some sort of fraudulent practice or invasion of privacy.”

Yet colleges charge what they calculate a family is willing and able to pay, said Vedder. And they do that using the detailed financial accounting their customers are required to provide.

Then there’s the Chivas Regal effect. That’s what economists call the psychology by which consumers assume that price is an indication of quality — that the more things cost, the better they must be. This means students feel better about getting into expensive schools and receiving scholarships that bring the price down, rather than choosing institutions that charge the same low price in the first place.

“People are not necessarily rational,” said Sandy Baum, a research professor at the George Washington University Graduate School of Education and Human Development and a leading scholar of higher-education finance. “They like to say, ‘Look I’m getting a good deal, I’m going to this expensive college but they love me and they’re giving me a scholarship.’”

Related: Aging faculty who won’t leave thwart universities’ attempts to cut costs

Knowing their customers’ ability to pay, and setting their prices based in part on prestige, are strategies colleges use to decide what to charge students, but might not relate to how much it actually costs a college to provide its product, these and other experts say.

Colleges also know that, whatever they charge, the government will help Americans to cover it. Students and their parents have access to a supply of credit with which to pay: student loans. The amount of student loans issued annually, most of them federally subsidized, rose from $53 billion in 2001 to $120 billion in 2012, a study by the Federal Reserve Bank of New York pointed out, and average advertised tuition grew 46 percent during that time in constant dollars.

The Fed report concluded that, for every dollar of subsidized loans issued, tuition rises 70 cents and that, for every dollar of federal Pell Grants, it goes up 55 cents. This supports what has come to be called the Bennett Hypothesis, after then-Secretary of Education William Bennett, who first proposed the idea that student loans drive up college costs in a 1987 op-ed column in the New York Times called “Our Greedy Colleges.”

This connection is widely disputed, including by the American Council on Education, the principal higher-education lobbying organization, and by Baum; if there were no loans, she said, some colleges and universities would in fact probably lower their costs, but many others would close and fewer students would enroll overall.

Related: The $150 million question—what does federal regulation really cost colleges?

Undisputed, however, is that institutions are using some of their students to subsidize others. English majors are charged the same amount as biology majors, for example, even though English classrooms are cheaper to provide than biology labs. Underclassmen, whose introductory courses are much bigger, subsidize upperclassmen, who meet in smaller classes that are more expensive to provide.

Higher-paying high-income students subsidize lower-income classmates by paying tuition universities and colleges need to underwrite financial aid. In public colleges, out-of-state students subsidize in-state ones. And international students, who almost always pay the full price (and sometimes more) subsidize everybody.

Schools also increasingly use their financial aid not only to help low-income students, but to lure students — often wealthier applicants from well-financed suburban public high schools and private schools — whose high SAT scores and other achievements help the institutions rise up in the college rankings.

One theory about college costs is that an institution will raise all the money it can to improve quality and then spend all the money it raises, said Andrew Kelly, director of the Center on Higher Education Reform at the conservative American Enterprise Institute.

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“And because you’re locked in this competition, there’s no end to how much colleges will spend and charge,” Kelly said.

Part of the problem, he said, is that the modern college experience is about a lot more than just going to class. Institutions aren’t necessarily competing to keep costs low or to improve student outcomes through direct spending on teaching. They’re competing on amenities: high-quality facilities, extracurricular activities, counseling services, diversity officers, high-tech computer labs, how nice their campuses look.

“Rather than treating college as this four-year experience where people go off to a country club-like atmosphere, to hang around and not go to classes on Fridays or over the weekends,” Kelly said, “we need to focus much more intently on what it actually costs to educate students effectively and compete on that basis.”

This story was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Read more about higher education.

Reproduction of this story is not permitted.

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Arianna Skibell

Arianna Skibell writes for The Hechinger Report. Before joining Hechinger, she covered health, education, race and criminal/social justice while earning her masters degree at Columbia… See Archive