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‘College Education Is Underpriced.’ Really?

October 7th, 2013 by dfarish

Yep, that’s the title of an op-ed in Forbes on Sept. 12, 2013. (Actually, the full title is, “There’s No College Tuition ‘Bubble’: College Education Is Underpriced.”)

Well, that contention came as a bit of shock to me, writing as I have been for many months about runaway sticker prices, and how colleges and universities need to address the issue before the federal government does it for them. What gives?

The author, Jeffrey Dorfman, a professor of agricultural economics at the University of Georgia, is a believer in the free market system and a self-described libertarian. Let’s see how his reasoning holds up.

In his op-ed, Professor Dorfman makes a number of provocative statements, including: “If the federal government offers more financial aid, colleges can offer less while keeping the total financial aid package the same size… There is no savings to students and their families.”

Is it the case that colleges reduce their financial aid in direct proportion to increases in federal aid? Perhaps that might be true for the tiny fraction of very wealthy colleges that are need-blind and are committed to meeting the full need of their students. These colleges fill in behind the federal grants with institutional dollars, so if the federal grant increases more than the increase in their sticker price, they would theoretically be able to reduce their financial commitment – but there are fewer than a hundred such colleges and universities in a nation that has more than 4,000 colleges and universities. Most campuses are able to meet only a fraction of the student’s actual financial need.

Thus, as a practical matter, when occasionally the size of the federal Pell grants is modestly increased (typically, a few hundred dollars at best), the gap between demonstrated need and the proffered campus financial aid package may narrow somewhat, but there is rarely, if ever, any savings by the institution. So this statement by Professor Dorfman is almost completely false.

Professor Dorfman also says, “After all, the only people paying the high prices for colleges are the ‘rich’ people who the very same critics [of high tuition prices] believe in taxing so highly.”

Professor Dorfman’s claim that only the “rich” people pay high prices is based on the model used by a relative handful of very selective and wealthy colleges that offer only need-based aid. For good or ill, the overwhelming majority of colleges and universities across the country also offer so-called “merit” aid – and children of wealthy families, who have often received an excellent K-12 education, commonly qualify for, and receive, such aid.

But the more important point is that the rising cost of higher education has put a strain on all but the very wealthiest families. It may be news to Professor Dorfman, but there are a good many relatively affluent families that struggle mightily to afford to send their children to college. It is most definitely not the case that the only people paying high prices are the rich. This statement, too, is mostly false.

And there’s more: “Students who expect to pursue careers that are not high paying would likely be better served by attending lower-priced public colleges.”

Should students choose a campus based on their projected earnings relative to the institution’s cost? Or, turning the argument on its head, should private colleges limit their academic offerings just to those majors that promise high earnings to graduates? Obviously, students and families need to be very careful about the amount of educational debt they assume, and should avoid a campus that will require their going into serious debt – but otherwise, the idea is ludicrous. There are many examples of students who majored in humanities and ended up running major corporations – or who later earned a graduate or professional degree from an outstanding university, based in large measure on the quality of the liberal arts education they received at their undergraduate institution.

The idea that only high income (or likely to become high income) students should attend private colleges, while the lower income students should be content with public universities, thereby perpetuating social inequities, is insulting – and it ignores the fact that many highly selective private colleges are in a position to be very generous to high achieving but needy students. This statement is not so much false as it is patronizing.

Finally, and central to Professor Dorfman’s argument, is this statement: “[B]y the standards of the economic marketplace, most colleges are still underpriced.”

He points out that top schools such as Harvard and Stanford accepted less than 6 percent of their applicants this year, and reasons, “In most businesses, when you have such overwhelming demand for your product, you raise the price…”             

Should Harvard and Stanford raise their prices? Well, such a step would presumably reduce demand, because students (and their families) who were unable to afford the new, higher, price might reasonably decide not to apply – but presumably Professor Dorfman would think they should be content attending a public university anyway.

For an economist, however, Professor Dorfman, in recommending that Harvard and Stanford raise their prices, is ignoring a very salient point: Harvard and Stanford (and most colleges and universities) are not-for-profit institutions, and therefore reap the very significant benefit of not having to pay taxes. Even under their current pricing model, these very affluent colleges and universities struggle with the embarrassment of riches that comes from:

  • having huge endowments (generating investment revenue that augments their operating budgets);
     
  • having very high prices that (in the Ivy League) more than 40 percent of their students pay in full; and
     
  • as a consequence, generating substantially more revenue than they need to run their campuses.

Raising their prices would generate still more net revenue, thereby potentially jeopardizing their tax exemption as a not-for-profit. So Professor Dorfman’s recommendation is not so much false as it is foolhardy.

Should we accept Professor Dorfman’s argument that college education is underpriced? My contention is that it is not underpriced for the overwhelming number of American families, and, should institutions of higher education ignore that fact, they will do so at their peril.