Every year, high school seniors across the U.S. vie for positions in the freshman class of universities nationwide. For some of the more academically inclined students, this means applying to small, private, “elite” liberal arts colleges. The very essence of these institutions typically entails a selective admissions pool and a high cost to attend. The harsh reality of contemporary college culture is that there is a higher concentration of students from upper-income families. Annually, demand for high-quality private education increases and supply seems to remain the same. The average price of tuition and fees for the top 10 liberal arts colleges (by U.S. News & World Report) was $39,600 in 2005; this alone sometimes intimidates candidates from even applying. Despite the prevalence of need-blind financial aid policies, the representation at top colleges of students from lower- and middle-income economic backgrounds is unsatisfactory at best. Private colleges have too much money to give out such small financial aid packages, especially considering their lavish endowments and alumni donations. Households view more financial aid as a lower price; colleges need to capitalize on this fact to attract less-well-off teens.
The college market far from satisfies the conditions of perfect competition. Even though there are numerous participants, schools are different in many senses, and barriers to free entry and exit exist (costs, denial). Furthermore, perfect information is not easily accessible to all possible applicants (poor high schools tend to have other concerns). Less wealthy children are deprived far before they get to college. The gap between the enrollment rate in college of high school graduates from the most affluent families and those from less affluent ones has declined over time, but is still significant. The lack of resources that is out of the student’s control (neighborhood, family history, etc.) influences their scholastic path. The market of tiny, private liberal arts colleges could be characterized more along the lines of an oligopoly, where a small number of strategically independent institutions are strategically interdependent. Abundant funding essentially proves to be a barrier to entry for other schools.
The college application process for excelling high school seniors is both stressful and unjust; institutions exercise price discrimination in their evaluations. Although this is technically illegal, the tuition-aid market is sensitive to the tendencies of potential students, who act based on the law of demand. Teens that go the early application route are exploited by financial aid officers; they are supplied less aid on the assumption that they are more eager to attend the school. Another bias lies in the interview portion of the application that many schools recommend; colleges give such “specs” less monetary support on the basis of added interest. But these students are no better suited to finance their tuition than the next kid who chooses regular decision. Colleges also monitor enrollment annually, adjusting their admissions policy according to statistical trends. Previously underrepresented demographics receive special treatment, including athletes and those interested in less popular disciplines. By the Coase Theorem, a purely public, uniform-cost higher education system would remedy this negative externality (i.e., the actions of private schools detrimentally affect those not directly involved in their affairs). Colleges would be able to bargain amongst themselves over the distribution of their services.
The lopsided nature of the financial aid game factors into the allocation of resources. Typically, lower-income families receive substantial support while upper-salary-bracket students require no assistance. The combined result is some middle-income families being forced to pay full tuition because they make too much to qualify for aid, but at the same time cannot contribute much, if anything, to the cost because their annual income is approximately equal to tuition. This leaves upper-class families with a consumer surplus, as they can easily afford to pay a year’s tuition. In 2005, Swarthmore College devoted $20 million for financial aid to only 750 enrollees, meaning half of the student body can bear the full $41,280 ticket for four consecutive years.
Lower-level families can only barely afford such an education, and at the hands of other sacrifices; implicit costs complement explicit prices. To meet their work-study package, students must take time away from their academic and social endeavors. The general opportunity cost to underprivileged students is a job or even an education at a cheaper institution. Employment yields a much higher marginal benefit to the student and their family. Other sunk costs associated with four years in academia cannot be avoided.
College, by training individuals for the labor force, produces human capital. Historically, an education at a competitive liberal arts college leads to a more lucrative career afterwards. For most families, paying for college does not end at graduation; the debt accrued through loans must still be repaid – a considerable burden regardless of higher earnings. A scheme that incorporates both reasonable tuition and higher earning power after college would benefit the economy as a whole. Spurring such a situation would contribute to the labor force and keep the unemployment rate low.
The U.S. government has made college education a private good (both rivalrous and excludable). On top of college-specific costs, the effect of the income tax hierarchy trickles down and imposes added inequality. Amidst the proposed Congressional multibillion-dollar cut to federal student loan plans, increased but limited government intervention into the funding of higher education could mean a better regulated, more egalitarian system.
Changes already evident, however, seem to be isolated and focused cases. The Cooper Union, which provides a full-scholarship plan for its matriculants, is specialized in its academic scope. Princeton uses no loans for financial aid - it funds assistance with endowments alone. If accepted applicants to Carnegie Mellon receive a better financial aid offer elsewhere, students send the school proof and it matches the package. Such progress is constantly being made towards more inexpensive higher education, but until the issue is resolved, prospective students will be forced to make tough decisions that will affect the scarcity and efficiency of their time.