Got Orthonomics in your Email Box?

Monday, October 26, 2009

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The part in orange is outdated as the Justice Department put a stop to this practice, but I'm including it for context.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.


Dave said...

I'd be very very leary of using 20 year old numbers.

Government direct aid has not scaled with college tuitions over the past two decades. Instead, student debt has gone up enormously.

((Fortunately, we at least seem to be on the verge of ending the corporate welfare boondoggle that is private lenders making governmentally guaranteed student loans))

JS said...

Can you change the orange? Very hard to read.

Dave said...

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.

It's also worth noting that this is an inaccurate simplification.

First, price discrimination happens all the time without any collusion -- coupons are a classic example of price discrimination.

Second, elite colleges (which were the only ones in this example) are not generally analagous to general businesses for the simple reason that a willingness to pay the nominal list price is still insufficient to actually purchase the product.

Anonymous said...

For another historical footnote, the Third Circuit Court of Appeals found that the financial aid practices that the justice department alleged violated anti-trust laws were NOT illegal. The decision can be found here.,
While the decision is rather techinical, it does point out some of the advantages of the process that was used including the ability to have the admissions process be blind to financial need.

ProfK said...

"In the ordinary transactions of the marketplace, competition from rival producers limits how much a given business can charge its customers." Maybe if you are talking about foil pans and toilet paper. But add "cachet" or "social status" or even "perceived benefit" and far from lowering costs, rival producers in competition drive up costs. The designer clothing manufacturers try to outdo each other as to whose products cost more, because that "costing more" is part of the cachet of the items being sold. Whether it should be that way or not, how "cheap" an item is influences how we look at its worth.

The Ivies cost more than a state school. If they cost the same then the thinking would go that they must be the same, ergo why would anyone "lust" after an Ivy education. Add in to perceived worth and name demand the fact that yes, the type of education and level of education at Harvard exceeds that at Podunk U. People still believe that you get what you pay for. Sometimes that is actually the case.

Charlie Hall said...

People aren't lining up to get into "Chevrolet schools".

Orthonomics said...

I'd line up for the proposed $6500 school, but we aren't getting any discounts. There are families paying the equivlant of one tuition for many, many children. They simply wouldn't be interested.

SuMMy said...

Here's a story about the issues of financial aid in the curren. This parallels exactly the problem you illustrate SL.

The Ant and the Grasshopper: The Yeshiva Tuition Crisis

Avi said...

SL - While I generally love your posts, this whole thread (trying to tie graduate education economics to problems with yeshiva day schools and high schools) seems like a stretch to me.

jewpublic club said...

That principle itself goes AGAINST the Torah as our sages say that learning can only be better in fierce competition and Sofer's (scholarly) jealousy. I know that if a melamed wants to open up a school business right next door to existing one, it is permissible only for education business. Does that Principal aware of that?
And yes, colluding and spooling in this particular area of our business is harmful more than Ivy League school colluding.

Commenter Abbi said...

"People aren't lining up to get into "Chevrolet schools"."

Charlie, than I guess you haven't seen today's Times yet:

Community colleges are bursting at the seams and are forced to hold classes at midnight and 6 am.

I think it behooves anyone having this discussion to understand that even struggling Jews still live in the rarefied and insular middle-classish society. This talk about the virtual "necessity" of Ivies or 4 year college in general just doesn't reflect the experience of a huge swath of American society. The people in the article want college degrees to become state troopers and surgical nurses (because they currently work as Dunkn Donuts cashiers and lab technicians.) State troopers and surgical nurse jobs are probably "beneath" most frum Jews, but that's really too bad, because they are stable careers with growth potential and steady pay.(that are actually quite common here in Israel, of course, because we don't have non-Jews to take care of these jobs for us).

This is real life. Is 4 year college a ripoff? Not sure, but plenty of poor Americans are crowding into community colleges and trying to make a stable career for themselves. If they can do it, so can frum Jews.

Miami Al said...

Commenter Abbi, there are two parallel discussions on economics on this site that don't overlap.

There is a Yeshivish or Yeshivish-supporting crew, that believes that many jobs are beneath Jews and thinks that people need to do more to support Jews that can't function in the economy. They are very active on SephardiLady's frugality threats (come up much more around Pesach), and generally support the status quo. They generally disparage education and hold up the one or two extremely successful entrepreneurs they know as an ideal, and live in relatively feudal communities where the wealthy business owners own everything and they all benefit from charity/subsidies.

There is an upper middle class contingent here from elite universities that are frustrated with the people that aren't shooting for the stars, and think that everyone should follow a path like ours to have a shot at making good salaries.

What this site doesn't have is lower-middle class observant Jews trying to make a better life for themselves. On the internet, you don't get moderates, you get the extremes, because moderates just don't get excited.

It's easy to scream from the rooftops about your HBS/Sloan/Wharton classmate making billions, and how everyone should aspire to that, or tell people that you can't earn a living and there is no point because it all goes to the Yeshiva, so let's clip coupons to get pasta cheaper. It's not exciting to scream about becoming an EMT, working on your paramedic certification for a pay increase, then finishing your AA for another one, then your BA and later MA, paid for by the department, while you work up the ranks.

In addition to the cultural barriers to discuss these VERY real paths where a community college degree elevates people from 20k -> 40k in earnings, and the commuter school degree bumps them to $55k and another $10k when you get the masters, there is an economic one. The gentile lower middle class that pursues this path for better earnings don't have 4+ children in private school, and if they are in a Church run school, total tuition for four children is about list price for one child in Day School. Combine this with an 100% Frum Tax rate (tuition) from $50k -> $150k/year in salary, and what's the incentive to borrow to get the degree (since there is no disposable income to pay for education) and improve your earning capability?

Orthonomics said...

You won't ever hear me say that community college isn't a great way to get a start in a career path. Personally, I'd rather see kids get a start in a field as a tech and work their way up that float around with no direction in pricier schools. But, I grew up in a blue collar town where community college was common.

Off the Derech said...

Let's not forget that many Orthodox people refuse to go to college for spiritual reasons.

Charlie Hall said...

Off the Derech,

Jews (and all Jews except Spinoza were religious back then) have been attending university since the time of the rishonim. I've seen no rabbinic objection prior to the 19th century. The idea of avoiding such for spiritual reasons did not seem to have occurred to the greats of the past, who of course we have to realize are greater than the greats of the present (yeridot hadorot).

Miami Al said...

Charlie Hall wrote, "(and all Jews except Spinoza were religious back then)"


All religious Jewish leaders professed divine truth to Torah back then. No organized groups of non-religious Jews existed back then.

At NO point were "all Jews" religious, or even "most Jews." The Talmud lists the crimes of the Jews of the First Temple era for which it fell. The Second Temple traded High Priests almost annually because the Kohain Gadol was usually corrupt and died within the year, attributed to spiritual failings in the Talmud.

In the dessert, the Jews rebelled against Moses at every opportunity.

There has NEVER been a time in Jewish history where all Jews were "religious." There HAVE been periods of time where all Jews in a town were under the governing authority of a Beit Din... when the gentile authorities so delegated it. BIG difference.