Monday, March 26, 2007

Variable Tuition Rates: Good or Bad?

By Richard Vedder

INSIDE HIGHER ED today discusses an emerging trend. Within universities, the tuition rate is increasingly varying with program. Critics argue this is a disguised way of raising tuition -- the institutional tuition rate goes up by, say, 5 percent, but then individual units add supplemental fees to make the real tuition increase larger.

While the overall rise in tuition costs that is aggravated by this move to differential pricing may seem excessive to many, the principle of varying the tuition between academic units is a sound one. In a non-selective institution, tuition fees are set where demand equals supply, and the supply for college services at any given price varies with the costs of providing them, absent cross-subsidies between units. Also, the demand for services can vary as well. Thus engineering and business programs might be expected to cost more -- salaries are higher for faculty in those areas, and the demand for the programs is relatively high. If universities want to obtain more usage of underutilized fixed expenses (including tenured professors), they should lower tuition charges in those areas, while increasing them in the areas where resources are strained to capacity. Thus the principle of differential tuition charges is a legitimate one, indeed one that I advocated in my book Going Broke By Degree.

At the same time, however, the rise in differential tuition fees has probably aggravated the overall rise in resources going to higher education, and may well have contributed to a short-run decline in productivity. If, for example, after a university announces a 5 percent tuition increase, the business school is allowed to tack on another 5 percent and use the money to hire a couple more assistant deans, and decides to give uber raises to some senior faculty, the differential tuition may be funding falling productivity and institutional rent-seeking more than allocative efficiency.

If market-based management (to borrow from Charles Koch and his new book) principles are going to come to higher education, individual units within institutions need to be given more autonomy with respect to their budgets, including the right to set their own tuition. Indeed, we may be moving towards a model where each major academic unit sets its own tuition fees, and pays a certain amount to the central administration to fund central administration (e.g., registration), the library, student services, and the football team. Units then control their own budgets, and can rent space to other units who are space short, and buy services from units within the university as well. While the pure market model has some imperfections, it can help lead to a more rational utilization of resources. For example, charge rent for space. Charge high rents for use of space (e.g., classrooms and labs) on Mondays through Thursday, 9 am. to 4 pm, but low rents other times --- and give away the space in the summer. Departments might start teaching more classes at odd hours and in the summer months when space is vastly underutilized. Market principles should play an ever bigger role in higher education. Charge tuition by the class, not the course, and vary it from class to class, by time of day, by the popularity of the professor, etc. And allow the productive resources to share some of the additional resources that come in as a result of being productive and efficient.

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