An Ivory Tower of Pricing

By Steven Pearlstein
Wednesday, November 14, 2007

The College Board is just out with its annual statistics on college finances and, once again, tuition and fees have risen faster than inflation or household incomes.

Once again, the higher education establishment has argued that this isn't what it appears to be -- an industry whose cost growth is out of control -- but rather a reflection of improved quality of student experience, more scholarships for those who need them, and continued declines in taxpayer support for state colleges and universities.

And once again, politicians have chimed in with well-meaning proposals to "make college affordable" by increasing federal grants and loans.

This debate is as agonizingly stale as it is contentious, driven largely by oft-repeated misconceptions and special-interest hokum.

Part of the problem is that it's virtually impossible to have a coherent conversation about an industry that takes in Harvard, East Podunk Community College and everything in between.

It's also hard to bring economic logic to a market in which the product is usually sold at a loss, competition tends to push prices higher rather than lower, and at many schools, half the customers are forced to subsidize the other half.

Nonetheless, I offer a few observations that might shed some light on the tuition puzzle:

1. College costs should rise faster than overall inflation.

The goods that go into calculating the cost of living include lots of things that have gotten cheaper over the years because of imports and immigrant labor. Those disinflationary pressures are largely absent from a university, where the biggest expense is for highly educated labor.

2. Most price increases are not being used to increase student aid.

The College Board data show that even after discounting for increases in aid, inflation-adjusted increases in tuition and fees have been 2 to 3 percent per year over the past decade.

That said, student aid is a big factor, and universities have now overtaken the airlines in pushing the limits of price discrimination -- charging customers based on their willingness and ability to pay. This reflects an admirable goal by many private schools of making higher education accessible to the poor and middle class.

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