College admissions and scarcity

[brickbacon]

The several recent threads on college admissions got me thinking about something that has bothered me for a while. Why do colleges even bother having a set tuition when the price someone actually pays at most schools is dependent upon their individual circumstances?

A growing number of private colleges are adopting the old car salesmen’s trick of setting high sticker prices then clinching sales by offering nearly everyone who walks in the door a special discount—or, in college terms, a scholarship.

A new College Board report on colleges’ tuition price-setting strategies reports that in the 2008-2009 academic year, the last year for which data is available, private colleges only collected about 67 percent of the tuition they would have received if they charged everybody their advertised prices. In other words, while private colleges’ average advertised tuition was a little more than $27,000 that year, students paid, on average, about $18,000—a 33 percent discount. In 2000, the typical private college advertised a tuition sticker price of $16,300 but the typical student paid about $11,700, an average discount of 28.6 percent. [SNIP]

Many parents find colleges’ high sticker prices scary, and the way they hand out scholarships confusing. Why don’t colleges simplify things by cutting their prices?

College officials fear that Walmart-esque everyday low pricing would actually drive more applicants away because many students and parents assume that higher tuition prices mean a higher quality education, a phenomenon known as “the Chivas Regal effect.” In addition, many admissions officials believe parents and students increasingly want to be able to boast to friends about receiving a scholarship, even if the end result is that they’ll pay more for the degree.

It’s admirable that college (and society) recognize the price-sensitivity of applicants, but quoting a tuition, one that only the rich pay, caps the upside. If we are gonna have price discrimination, why not do it in a more effective manner. Especially since education costs per student often exceed even sticker tuition prices. Because of that, colleges are leaving lots of money on the table that would come from the least cost-sensitive group of applicants. This NYT article talks about the growing number of Chinese students attending the University of Delaware.

He chose to attend college more than 7,000 miles from home, Mr. Fan said, because “the Americans, their education is very good.”

That opinion is widely shared in China, which is part of the reason the number of Chinese undergraduates in the United States has tripled in just three years, to 40,000, making them the largest group of foreign students at American colleges. While other countries, like South Korea and India, have for many years sent high numbers of undergraduates to the United States, it’s the sudden and startling uptick in applicants from China that has caused a stir at universities — many of them big, public institutions with special English-language programs — that are particularly welcoming toward international students. Universities like Delaware, where the number of Chinese students has leapt to 517 this year, from 8 in 2007.

The students are mostly from China’s rapidly expanding middle class and can afford to pay full tuition, a godsend for universities that have faced sharp budget cuts in recent years.

The article goes on to discuss some of the added costs and qualification discrepancies some schools find with some Chinese students, but I think the larger takeaway is that there is a large number of people willing to pay sticker price for an American education. Yet, that sticker price is not based on what they can and will pay, it’s based on what they have been asked to pay. That price function as a signal of quality, not a market signal.

We have a situation where the sticker price of universities is neither tied to the cost of education (due to endowment distribution, grants, scholarships, and state subsidies), or market forces. Why don’t we try a better way of dealing with the scarcity.

I propose universities should/should be allowed to auction 10% of their student admission slots to the highest bidder. The upside would be that those students would likely cover the real costs of their own education, and might even help subsidize their less fortunate peers. People, willing and able to pay, would be paying an amount closer to the value of the admission, rather than being implicitly subsidized by society. Additionally, since you would only be auctioning spots, the winners would still have to compete with traditional students, sinking or swimming gradewise.

Another reason I support a more transparent system such as this is because I believe such a system exists anyway. Not only via granting preference to legacy students, but also by recognizing most of the family member of those who donate tons of money to a school will likely have no problem being admitted. The chances that Gordon Moore’s kin have any trouble getting into CalTech (he donated 600MM to the school) is basically zero. Since we already have an unorganized system like this operating in the shadows, why not just formalize it?

My system would function as follows:

1. Each school would auction off 10% of spots before any other applicants were evaluated. This way, you would not be able to hedge your bets by applying through traditional means first.

2. The winners would pay a one-time fee for a slot in that class. This would be done to ensure that there was no ongoing financial incentive on the part of the university to keep those students if they didn’t have the academic chops.

3. Any funds above and beyond the costs of their actual education would go towards subsidizing their peers, and mitigating any future tuition hikes, and establishing an open, online feeder school that would used to identify talented people without pre-filters.

What would be the problem with a system such as this?

[erislover]

I think the auction mechanism is vastly underused. I have no strong feelings on this particular topic, though. With that caveat, can you explain why you chose 10%? Any intuition on your part, or just one of those nice round numbers?

[brickbacon]

@erislover

I think the auction mechanism is vastly underused. I have no strong feelings on this particular topic, though. With that caveat, can you explain why you chose 10%? Any intuition on your part, or just one of those nice round numbers?

Well according to most cites I have seen. Around 20% of people pay sticker price at most expensive/elite schools. Assuming there is no discrimination in the admissions process for ability to pay, you have 20% of applicants willing and able to pay full price. I figure if you can get a decent percentage of those folks to opt to pay vs. trusting the application process.

So basically, I just used a round number :D. That said, you wouldn’t want it to be too high for obvious reasons.

[Thudlow_Boink]

@brickbacon

Another reason I support a more transparent system such as this is because I believe such a system exists anyway. Not only via granting preference to legacy students, but also by recognizing most of the family member of those who donate tons of money to a school will likely have no problem being admitted. The chances that Gordon Moore’s kin have any trouble getting into CalTech (he donated 600MM to the school) is basically zero. Since we already have an unorganized system like this operating in the shadows, why not just formalize it?

Call me cynical about your cynicism, but is this really the case, that applicants whose relatives have donated large amounts to highly selective universities are automatically accepted, regardless of how unqualified they may personally be?

[brickbacon]

@Thudlow_Boink

Call me cynical about your cynicism, but is this really the case, that applicants whose relatives have donated large amounts to highly selective universities are automatically accepted, regardless of how unqualified they may personally be?

I have no proof of those particular things happening, but I do know of a family friend who got their child into a school based on her relationship with the dean of admissions. Without going into too many details, it was clear she would not have gotten in on merit alone. Knowing that things like that happen, I would be very surprised if a call from the a large donor to a school wouldn’t grease the wheels considerably. Also, when stories like at this are reported at prep schools, I have to think this is a common at the college level.

So he wanted his son to have that same experience. Knowing admission can be competitive, he began meeting with adminstrators about five years ago, and recalls a specific discussion about a capital campaign where the schools motto was, “Give until it hurts.” He claims he was asked for $100,000 on a piece of paper.

“I told him if I do contribute, I would like to know that my son is going to be attending this school. And he said, 'Well yes, of course,” Dr. Barwil told us.

He says he ended up pledging half of that and to date has paid $40,000 to the school. But when admissions letters went out this past spring, the father says his son was turned down. The letter said, “he wouldn’t be happy” there.

[Namkcalb]

@Thudlow_Boink

Call me cynical about your cynicism, but is this really the case, that applicants whose relatives have donated large amounts to highly selective universities are automatically accepted, regardless of how unqualified they may personally be?

Yes

[appleciders]

@Thudlow_Boink

Call me cynical about your cynicism, but is this really the case, that applicants whose relatives have donated large amounts to highly selective universities are automatically accepted, regardless of how unqualified they may personally be?

Well, not entirely regardless of quality, but it’s a strong factor. Consider this example: An excellent private college has 10,000 applicants to fill a freshman class of 2,000 slots. Maybe half of those 10,000 applicants are qualified (down to 5,000) and of those most (say 3,000) are excellent candidates, all of whom would probably be a credit to the institution. Now you’ve got 3,000 candidates to fill out 2,000 slots, and you’ve already eliminated the obviously inferior. So what do you do? You’ve got to sort out these similarly qualified applicants (at great difficulty and expense), so you start by accepting the 100 or 150 in the remainder whose parents are wealthy and powerful, who can pay full price and may well donate additional money to the school, either during the education process or years later. That extra money will tend to provide a better education for those students who were truly exceptional but couldn’t pay full price, so you sleep well at night, convinced that you’re doing the right thing.
Is it really the right thing to do? I don’t think so; I think that having a true meritocratic system is more important than making somewhat more money in the process. Personally, my alma mater recently abandoned their “need-blind admission” policy, which specifically forbade the process that I described above, and I won’t give them a dime unless they reinstate it. But that’s the process.

[furt]

@brickbacon

Since we already have an unorganized system like this operating in the shadows, why not just formalize it?

Because Colleges and Universities care more about prestige and reputation than they do about money. (Undergraduate education is, of course, waaaay down the list)

Your scheme requires major stakeholders in higher-ed, including the faculty, to admit they are, at least in some ways, an industry providing a service to consumers – with the according logic that consumers should factor in price when shopping for education, same as when they buy other things. That whole concept is extremely offensive to many in higher ed, especially the faculty: many of them are very deeply invested in the idea that a good education is literally priceless.

They fear – and rightly so – that once people start thinking of higher education as an service industry, with students as consumers and themselves as service providers required to produce value, the status quo will begin to change. At for-profit schools, where the student-as-consumer model is embraced, faculty do not have tenure, they are expected to spend more time with students, and they do not have anything near the level of power that their peers in non-profit instututions.

Now, the hard reality is that increasing numbers of students do shop on price, and the admissions office knows this, which is why they will pull out out scholarship money to get students they really want, and let others who are less desired pay full-freight. But this is less public, and so preferred.

More concretely, it’s doubtful that a lot of students would pay much more than the sticker price anyway. The number of really, really rich people willing and able to pay any price to get junior into the college of his choice is pretty small. You get almost as much money just by getting 30-40% of your students to pay full price, and you avoid the embarrassing headlines about how your school has sold out.