e are putting colleges on notice,” President Obama said on the footsteps of the University of Michigan a few weeks ago. “You can’t assume that you’ll just jack up tuition every single year.”
Bizarre as it sounds, those who will benefit most from a presidential tuition cap are the wealthiest few, not the struggling middle class. When government interferes with the marketplace, the outcome is often quite the opposite of what is intended.
The publicly reported tuition price Mr. Obama wants to cap is just a sticker price — to which a onethird discount typically is applied. According to the College Board, private colleges collect just twothirds of the revenue they would receive if students paid the official tuition.
Even high-priced universities discount their product line. “The more expensive and prestigious the school,” says financial consultant Marcia Sullivan, “the more likely it is well-endowed and can meet 100 percent of need.”
The two-tier pricing system in higher education is as pervasive as Fourth of July sales at retail stores. Those who can afford the high price skip the sales, while the more financially strapped, by shopping at the right time, get the same product for less.
Unlike the retail-store savings, the discount in higher education is given only if you can prove you are in need. To get financial aid, colleges insist on seeing a family’s financial statement. Those in the top 1 percent must pay full price.
But if government puts a tight cap on tuition, colleges will balance their budgets by cutting the scholarship fund. To fill their freshman classes, they will admit more students willing to pay full price: students from overseas and less able children from wealthy families living in exclusive ZIP codes outside New York City, Chicago and Washington, D.C.
Keeping tuition rates low while cutting financial aid has been tried before. Years ago, the University of Chicago decided that much of its two-tier pricing system should be abandoned in favor of a common, lower tuition for all students, a strategy that has worked for Wal-mart, which has everyday low prices all the time.
But this one-price strategy has seldom worked in higher education. The University of Chicago soon gave up its one-price experiment when it discovered that students like being told they have won a scholarship. It’s even better than getting overpriced chocolates for half price at Macy’s on Valentine’s Day.
But if Mr. Obama caps the official tuition rate, colleges and universities surely will cut scholarship assistance. State universities will modify their strategy of offering a discount price to in-state residents, while boosting rates charged to foreign and out-of-state residents. Last year the University of Washington sharply raised its tuition for foreign students and out-of-state residents to $28,058, while in-state students were given the discount price of $10,574. Had a tuition cap been in place, the university budget would have been balanced on the backs of the in-state students.
The higher-education system in the United States is highly competitive. Thousands of schools are trying to attract students who constantly compare prices, course offerings and on-campus amenities. The major factor driving prices upward is not greedy administration but the rising cost of well-educated professional workers in an industry that has a lot of them. Colleges compete by claiming to offer small classes. That costs money. Capping tuition does not change that reality.
If the Obama administration really wants to solve the dropout crisis in higher education, it would not cap tuition but put the federal Pell Grant and student loan programs on a merit basis. Admittedly, many young people need higher-education loans at a time in their life when they have little capital, and grants for low-income students can equalize educational opportunity. But there is little rationale for handing out vast amounts of federal dollars with little regard to student accomplishments in high school. If government assistance were limited to those who demonstrate college readiness on validated external examinations — the Advanced Placement exams or the International Baccalaureate, for example — students would be motivated in high school to prepare themselves for college-level courses.
As it is, Mr. Obama’s proposals may appeal to a core constituency of young voters, but effects will be other than what has been promised.