Why California's Tuition Hike Might Be a Good Thing

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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  1. Anon says:

    You know, this article would be a lot more credible if the numbers weren’t so flat out wrong.

    Claim: UC Berkeley charges $5,858 per semester for undergraduates.

    Fact: UC Berkeley charges in state residents $10,333.50 a year and out of state residents $33,050.50 a year.

    http://registrar.berkeley.edu/Registration/feesched.html

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  2. Ian says:

    I think that the flaw in this reasoning is that financial aid doesn’t result in charging people what they can afford to pay. It results in charging people what the financial aid formulas say they can afford to pay.

    There’s a very strange time between the ages of 18-25 or so where

    1. Your parents aren’t obligated to provide any financial support.
    2. All universities assume that your parents are funding your education.

    This may be the best we can do, given the potential for fraud if people were allowed to unilaterally declare that they wouldn’t pay for their children’s education, but did anyway, but, for those people who really are on their own but are not helped by the financial aid formulas, actual cheap tuition is their only chance at a good education without going into horrendous debt.

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  3. Todd Bellamy says:

    Students are now paying more than half the cost of their education at public universities. When their costs are no longer subsidized by the state then maybe they can have some say in getting rid of bad tenured professors.

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  4. Megan says:

    Having worked with economically disadvantaged high school students in the past, I am confident in stating that low/middle income students would be dissuaded from applying to universities with high tuition rates. Considering the fact that they don’t learn about their financial aid packages until months after applying, they may view their application to an ‘expensive’ university as a waste of time. Most of my students could receive only a limited number of application waivers. Therefore, they limited their number of applications to the most probable and cheapest universities possible. It is disconcerting to apply for an expensive university when you are weary about cost of tuition. Before finding out what potential scholarships and financial aid he may have gotten, one of my students decided to join the Marine Corps, because he was scared that he wouldn’t be able to afford college – even with financial aid.

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  5. Jim B. says:

    If agents are rational *and* well informed, I agree with the basic point you’re making. But, even if financial aid increases proportionately, that doesn’t mean that qualified students won’t be scared off by high sticker prices. Perception matters, and the perceived extra burden may qualified kids from poorer families/communities from applying, especially if they are unaware of the menu of financial aid opportunities available to them.

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  6. Bill says:

    Your argument makes as much sense as saying it’s okay if health care costs keep rising for everyone, as long as the government keeps subsidizing more and more for all those who can’t afford to pay their own way. Ultimately the system will collapse, which is exactly where we are headed with health care.

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  7. Tucker says:

    I think Ben has a real point that’s undersold. I was in a similar conversation with a first generation college graduate who now wants to work in an alumni office. She transferred from a lower tier school to a better regarded school and while the sticker price of the second school was higher, she ended up paying less per semester of going there because of aid. Meanwhile the vast majority of lower-income prospective students will end up sticking with that first type of school and end up with higher debt and lower lifetime wages. Parents may be especially vulnerable to the sticker shock problem at better regarded schools, even if median or 25% percentile expenses are equal to or below those at lets say third tier public or private schools.

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  8. Alex says:

    The UC fee hikes were passed under the guise of financial need. The UC system lost approximately $400 million of state funding, but still has a sizable $3.3 billion budget. As Erik points out, the raise in fees is not coupled with an increase in financial aid and, as Walter points out, the form of financial aid offered at most UCs is a combination of small grants and subsidized loans. Students receiving financial aid at UCs (I cannot speak for other public institutions) end up falling into debt.

    The money the UC system lost from the state provided a ready-to-hand excuse to raise fees, which they have under a lot of smoke and mirrors. What seems apparent at this point is that the UC system raised its fees so it can claim a greater income and, thus, borrow more money for construction projects. Walk around a UC campus and wonder at all the construction occurring during “hard” financial times. Even if this were not the case, the UC system–a public institution–has not put their budget and spending in public view. If one-third of the fee increase goes to financial aid, it is only to create a viably defendable position. The reality is that the UC is cutting the number of class days, the number of (required) classes offered, services, and lecturships–all while increasing fees. They are not only making it less affordable, but they are simultaneously degrading the quality of education.

    In any case, cute idea, but it seems largely unaware of what is actually happening in the UC system.

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