Saturday, December 05, 2009

Why California's Tuition Hike Might Be A Good Thing

Ian Ayres

Crosspost from Freakonomics:

Students at University of California schools have been protesting the decision of the Board of Regents “to raise undergraduate fees — the equivalent of tuition — 32 percent next fall.” But higher tuition, if it is accompanied with higher financial aid for lower- and middle-income students, improves equity. As Aaron Edlin and I wrote back in 2003:

It might seem … that raising state college tuition is plainly a bad thing. High tuitions mean students will find it harder to finance college — and may not even attend, or may drop out due to costs. And for the students who attend state colleges, many of whom are of modest means, the tuition crunch may be especially painful.

In fact, that is absolutely not the case. The truth is that increasing public college tuitions are not a problem at all. Indeed, the biggest problem in pricing tuition at public universities is not that the poor pay too much, but that the rich pay too little.

Tuition increases are actually a good idea — as long as they are matched with financial aid, including scholarships, for poor students.

The Huge Gap Between Average Public and Private University Tuitions

Consider a comparison: U.C. Berkeley offers more courses taught by more Nobel laureates than Yale. Yet Yale charges $28,400 per year in tuition and fees, while Berkeley charges $5,858.

And this is no anomaly: tuitions at public universities average $4,694 compared with $19,710 at private colleges. In short, public university tuition, on average, costs less than one-quarter of private university tuition. (And that is even in light of this year’s public university tuition increase of 14 percent — the largest in at least a quarter of a century.)

Who benefits from the low public-school tuitions? A disproportionate amount of the benefits go to rich students who attend schools like Berkeley because of the way financial aid operates.

The Problem for Poor Students Is Low Financial Aid, Not High Tuition

What happens, then, when public university tuitions rise, as has occurred recently? Perhaps surprisingly, the situation becomes fairer.

The rich Berkeley student now must pay a tuition much more commensurate with what he or she can afford. And the poorest Berkeley student are typically not much worse off: as tuitions have risen this past year, those from the poorest families saw their financial aid packages rise almost dollar for dollar.

For poor students, then, the important issue isn’t tuition so much as financial aid. [If] students can’t afford the fee increases at UC Berkeley, … the answer isn’t a tuition decrease; it’s a financial aid hike.

Why Public Universities Should Continue to Raise Tuitions Even More

Thus, the member schools of the California system, for example, would be wise to radically increase both their tuitions and their financial aid.

For instance, suppose UC Berkeley raised its tuition by $20,000 per year and gave all but its richest students an extra $20,000 scholarship. With the extra money it got from its richest students, it could balance its budget. And, having done so, it would not need to burden students even from middle-class families.

A side benefit of raising tuition and financial aid is that it would increase UC’s position in U.S. News rankings which turn in part on the amount of financial aid granted:

Would Berkeley deserve this position increase? Absolutely. The bump up in ranking might seem to be the result of sleight of hand or subterfuge; after all, Berkeley’s increased financial aid would be required only because of its own decision to raise tuition.

But in fact, the change would only equalize Berkeley with schools like Yale, which currently get a ranking advantage using the very same “sleight of hand.” That is, Yale chooses to charge a very high tuition, but then effectively waives a great deal of it through financial aid.

Moreover, Berkeley is already, in effect, giving lots of financial aid out — but it goes to the wrong people, and it isn’t counted in U.S. News ranking. Every affluent student who attends Berkeley, not Yale, in effect gets a $20,000 scholarship to do so. The current aid is just given in the hidden form of low tuition.

Financial aid is, at its core, a price-discrimination scheme. Consumers pay different prices (net of financial aid) for the same service. Higher education is the very rare market where the seller says “Tell me in detail about your ability to pay, and I’ll tell you what your (net) price will be.” But instead of maximizing firm revenue, the goal is to enhance equity. By increasing the effective tuition for some of our wealthier students, we might be able to reduce the price for some of the less wealthy.

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