Is College Really Getting More Expensive?

Thanks to my only real source of news, NPR podcasts, I learned that the cost that college students are paying for tuition isn't rising very fast at all. This story from Planet Money tells a very different narrative than the one I'd been hearing for years. So I was skeptical. But as the good folks at NPR make clear, the disparity makes sense. There are two costs being tracked: the sticker price, which is the cost that colleges list on their official websites, and the net price, the average price that students actually end up paying. So while the sticker price is increasing, most students do not pay the sticker price.

The narrative told by the price students actually pay the university, the net price, is a lot more interesting. That number is increasing very slowly -- tracking with inflation, basically. According to a College Board report, that net price actually decreased over the past decade, when you account for inflation. (Want another shocking statistic? The median published tuition and fee price at private and public universities was only $11,093 for undergraduates in the 2013-2014 school year.)

Still, it makes you wonder. Why would colleges artificially create higher list prices, when the true costs are staying relatively flat? There are a few reasons. As the podcasters note, schools are competing heavily for the best students. One of their marketing tools is to offer a big discount from the list price as a merit scholarship. As any shopper knows, it is harder to resist a big discount off of a high ticket price. The higher the original price, the better the impact. On the podcast, an administrator stated that the real reason merit scholarships are offered are to change a student's decision to enroll at a university. It's used to close a deal.

This is the Anchoring Effect in action. A cashmere sweater that's simply showing a $50 price tag is not as enticing as a $100 sweater that is 50% off. Even if they are the same exact sweater, the $100 sweater seems nicer. It's the same price, but a better deal.

But here's the tricky part: once the seller establishes an initial price, we start making assumptions about the product's quality. The high priced sweater seems softer. More durable. More stylish. In the university's realm, the high sticker price of $55,000 per year establishes a certain aura of prestige and quality. At that price, the school must be pretty good, no? So when a half-scholarship is later offered, the prospect of attending that expensive school gets a lot more enticing. You're now being offered a better education at a great deal. It's no longer seen as a $27,500 tuition...it's a $55,000 annual tuition that's half off. Never mind that the prices are being intentionally manipulated to create that impression.

The higher price also allows the university to offer a wider range of prices to students. A school can have some students pay the full sticker price, so long as they have the means and are willing to do so. The administration can also offer lower prices to desirable students who don't have the financial means to attend. This shows the advantages of segmented pricing. By being able to offer a wider range of prices, the school gets a better mix of students than they would have with a single, set price.

The rub is, as with the sweater, it's the same product when it's all said and done. The student who's paying $27,500 might feel she is getting a good deal, and so might the student who's paying $55,000. Both students' feelings are valid, so it's a matter of perception on one level. On another, we're talking about an education that is, for all intents and purposes, the exact same service being sold at shockingly different prices. They can't both be getting a good deal, can they?

*Photo is from Queen's College at Flickr Creative Commons.