Education and Economics: "Financial Aid"

The part in orange is outdated as the Justice Department put a stop to this practice, but I'm including it for context. While the Ivy Leagues may no longer collude, it is certainly relevant to the discussion of tuition as such a practice was just proposed by a Brooklyn school principal in the Yated who is upset that parents are "shopping around" for schools. He believes a "unified standard of tuition as well as scholarship standards" can put a stop to this awful practice. It certainly could put a stop to such a practice and destroy any semblance of a market. So take the orange notes in historical context. Additionally, even where there is not organized collusion, I have heard of certain schools that wait to see where other schools set tuition before raising their tuition.

While the parallels to our own yeshiva system are not particularly strong, I do see some parallels, most specifically that "financial aid" in the form of credit and perhaps even "subsidies" from grandparents allow (combined, of course, with pressure to stay within the system) allows for an exponential increase in tuition. Additionally, our schools know a tremendous amount about the finances of their applicants and are able to create individual tuition prices, which is probably one of the challenges that stands in the way of creating "Chevrolet Schools."

I hope that everyone has taken some new idea out of these excerpts. I feel I have more clarification over certain concepts. So, at the very least, it has been interesting to me. :)

In the ordinary transactions of the marketplace, competition from rival producers limits how much a given business can charge its customers. In the academic world, however, organized collusion among some of the most expensive colleges has stripped the students and their parents of this consumer protection. Each spring, for 35 years, the Ivy League colleges, M.I.T., Amherst, Northwestern, and a dozen other colleges and universities have met to decide how much money they would charge, as a net price, to each individual student out of more than 10,000 students who have applied to more than one institution in this cartel. The lists of students have been compiled before the annual meetings and officials from the various colleges have decided how much money could be extracted from each individual, given parental income, bank account balance, home equity, and other financial factors. Where their estimates differed, these differences were reconciled in the meetings and the student then received so-call "financial aid" offers so coordinated that the net cost of going to one college in the cartel would be the same as the net cost of going to another.

The U.S. Department of Justice began investigating these and other colleges in 1989. With a legal threat of anti-trust prosecution by the government, and a class action suit on behalf of students, handing over this group of colleges, pending the outcome of the investigation, Yale and Barnard dropped out of the meetings in 1990, and in 1991 the meetings were canceled.

A cartel or a monopoly maximizes its profits by charging not only a high price but also, if possible, a different price to different groups of customers, according to what they market will bear in each separate case. Seldom can most business cartels or monopolies carry this to the ultimate extreme of charging each individual customer what the traffic will bear, as the academic cartel did. But academic institutions are armed with more detailed financial information from financial aid forms than most credit agencies require, and for decades have been comparing notes when setting their prices, in a way that would long ago have caused a business to be prosecuted for violation of the anti-trust laws. In other respects, however, the colleges and universities use the same methods as business cartels or monopolies. Like monopolistic price discriminators in the commercial world, private colleges and universities set an unrealistically high list price and then offer varying discounts. In academia, this list price is called tuition and the discounts is called "financial aid."

The widespread availability of financial aid--often received by more than half of the students at the more expensive colleges--changes the whole nature of tuition. Back when scholarships were awarded to a needy fraction of the students, this was clearly a matter of philanthropy and reward for academic ability. Today, varying amounts of financial aid are awarded up and down the income scale, and very little of it has anything to do with the quality of the student's academic record or with philanthropy to the poor. Approximately two-thirds of the undergraduates at Harvard and four-fifths of those at Rice receive financial aid. The average family income of financial aid recipients at Harvard in academic year 1990-91 was $45,000. These financial aid recipients included more than 400 whose family incomes were above $70,000, of whom 64 came from families with incomes exceeding $100,000.

Harvard is not unique in this respect. At Marquette University, for example, out of 119 students in the class of 1989--90 who came from families with incomes of $60,000 to $70,000 and who applied for financial aid, 71 were declared eligible for it, as were 74 of 192 students from families with incomes above $70,000. Similar figures are common at other private colleges and universities. The President of M.I.T. noted that financial aid applicants at that institutions "are distributed almost uniformly across the spectrum of family income." The percentage of applicants who receive aid typically varies by income level and so does the amount of the aid received, so that the net price actually charged is adjusted to the most that can be extracted from each applicant's family.

Ordinarily, price discrimination does not work in a competitive marketplace, because those charge extortionate prices will be bid away by competitors, until the price is competed down to a level commensurate with the cost of producing whatever commodity or service is being sold. But this does not happen among high-priced colleges which engage in organized collusion. The picture is complicated somewhat by the fact that the term "financial aid" encompasses both paper discounts from tuitions listed in college catalogues and actual transfers of money--the real bulk of this money being government-provided or government-subsidized. Philanthropic aid also continues, enabling a needy fraction of students to cover their cost of living, as well as tuition. Fundamentally, however, college-provided "financial aid" is a method of producing a sliding scale of tuition charges, like ordinary price discrimination elsewhere--and like successful price discrimination elsewhere, it is a by-product of collusion.

Next up: To be determined.