Let’s End the Deception About the Cost of College

North Carolina should lead the way on clear, nondiscriminatory pricing.

Here’s a startling fact about higher education—nearly all colleges and universities list their prices deceptively. They post a high tuition figure, but very few of their customers (students, or as a professor friend of mine suggests calling them, “tuitioners”) actually pay it. Instead, most are given discounts of varying amounts.

Except for our most prestigious institutions, most colleges have excess capacity and are therefore willing to “sell” places for substantially less than their advertised cost. It’s reminiscent of the days when you could buy a car for considerably less than the sticker price if you knew how to play the game.

Why are things this way? Does it matter? And what, if anything, should be done?

Most colleges now post “list prices” that are far above what they actually charge students.Those are the questions posed in a recent National Affairs essay entitled “The Truth About College Costs,” by Dan Currell, the CEO of Digital Commerce Alliance and a former senior advisor in the Department of Education.

Currell observes that most colleges now post “list prices” that are far above the amounts they actually charge students. Here’s an example he gives. Beloit College has an advertised tuition of $69,000 per year and a student body of around 1,000. But Beloit doesn’t collect $69 million annually; its operating budget is only $43 million. The big discrepancy, of course, is due to the huge discounts it offers students, euphemistically called “institutional aid.” Perhaps a few students, probably foreigners with abundant wealth, pay the full price, but all others pay substantially less.

Colleges behave this way, Currell explains, because they realized back in the 1980s that high prices could actually be beneficial to them in their quest for more revenue. As former Harvard president Derek Bok once wrote, “College presidents, compulsive gamblers, and exiled royalty have one thing in common—there’s never enough money.” Deceptively high tuition rates help to bring in more.

Currell writes, “Positioning one’s school as ‘almost as expensive as Harvard’ created a sense of exclusivity and, somewhat contrary to economic theory, resulted in increasing applications.” This has been dubbed the Chivas Regal Effect: Students and their families will think that your school must be very good simply because you charge a lot for admission.

The problem is that when most colleges are trying to work that angle, they eventually discover that there aren’t enough students who are willing and able to pay full price. Thus, they have to offer discounts to fill empty seats. But it wouldn’t do to admit that they were behaving like businesses that need to move excess merchandise. The clever marketing people at colleges therefore hit upon the idea of calling their discounts “scholarships” and “institutional aid.” That enabled them to enroll even mediocre students and simultaneously butter them up by telling them (and, even more importantly, their families) that the kid was sought for his or her academic acumen. Very smart.

The prevalence and extent of tuition discounting has grown while the college bubble has been deflating over the past decade or so. In this Martin Center article, Chris Corrigan notes that tuition discounts are getting deeper.

Tuition discounting has grown while the college bubble has been deflating.Moreover, Currell writes, “In real-dollar terms, today’s private college students pay a little less than they did in 2005; that year’s tuition was only about 10% more than it had been ten years earlier.” Stated tuitions have continued to increase, but not the actual cost of attending, thanks to those phony “scholarships.” That is not at all surprising, given the falling demand for college credentials, but many Americans continue to believe that college degrees are a good investment, and they continue to borrow to finance them.

The decline in the real cost of college is good news, but Currell is troubled by the pervasive deceptiveness of pricing. For one thing, he argues, the system has a reverse-Robin Hood effect because lower-income students often pay more than the average student. Worse, he writes, “Our college dishonesty in matters of pricing causes harm in a host of ways. For one, the impression that college is ruinously expensive has induced unnecessary anxiety in millions of families and scared away many students from college entirely.”

He may be right about that. Although quite a few students who really don’t belong in college are still lured in, there may well be some who would actually benefit from college but are deterred by the perceived high cost. Sometimes people who are considering college can find out about the actual cost by digging into publicly available data, but, as Dan Way showed in this Martin Center article, some UNC-System schools make such data (Common Data Set) hard to acquire.

As Way explains, “Without a Common Data Set, it can be difficult, if not impossible, to determine important financial facts about a school, including how many students pay the tuition list price, how many receive discounts and scholarships to ease their monetary burden, and what the average award is for the monetary supplements.”

Way makes a good point, but why should state universities engage in the pricing games that make it necessary for families to dig into obscure data sets?

Whether or not some worthy students are dissuaded from trying college due to the cost/discount gamesmanship schools play, as Currell argues, the practice is still objectionable. It is one thing for a business—an airline, for example—to charge differing prices to maximize revenues. Profit-seeking firms should do that. But it is unseemly for non-profit educational institutions to do likewise, particularly state-run colleges and universities. They should not act as revenue maximizers and ought to charge all residents the same, playing no favorites.

The deceptiveness of college pricing could be attacked by state authorities under their consumer-protection statutes.Currell argues that the deceptiveness of college pricing could be attacked by state authorities under their consumer-protection statutes against false advertising. He also suggests that the U.S. Department of Education could enforce an existing regulation that prohibits schools from “substantial misrepresentation in all forms.” College officials are clearly not inclined to back away from their high-price/high-discount strategy. Currell explains that the first school to go back to honest tuition would suffer because it would lose students to competitors who still play the tuition game, so no one dares to go first. A threat from the Department of Education might be necessary to break the cartel.

Unlike almost everything else the department does, that might actually have a salutary effect.

Here is my suggestion. State legislators could adopt a one-price policy for the institutions they control. Tuition would be set the same for all students, except for those from other states or foreign countries. We would thereby end the deceptive pricing game. In North Carolina, all UNC-System institutions would have a posted, accurate tuition rate for residents and another rate for non-residents. A state should no more have different prices for college education than it should, for instance, have different prices for a driver’s license renewal.

Opaque and discriminatory pricing for college is a bad idea. I would like to see North Carolina’s legislators lead the way in ending it.

George Leef is director of external relations at the James G. Martin Center for Academic Renewal.