Third Parties Pay for College

By Richard Vedder

The new survey on how college is financed done by the Gallup organization and Sallie Mae reinforces a point I often make --the individuals attending college pay a minority of the costs. In "How America Pays for College" it is indicated that roughly 40 percent of the net cost of college is paid for by the consumer --the student. Using the net price (including grants and scholarships), the student pays barely one-third of the total.

Moreover, the student borrows most (about 70 percent) of his/her costs, so in the short run roughly only a tenth of the cost is paid directly by the student. Moreover, this grossly OVERSTATES student payments, since the costs that students are expected to pay are reduced because of institutional income received from government subsidies or private gifts and investment income.

To be sure, a majority of the student provided financing comes from parents and other relatives, and students cannot view those funds as pretty "free" gifts unencumbered by any obligations. Perhaps students view themselves as part of a family, and that the family income is part of "their" income. Nonetheless, I think most students are somewhat less price-sensitive because of the receipt of interfamily financial transfers to pay for college.

It is also interesting to note that the wealthy pay more for college than the poor, but that the income elasticity of payments is rather low --that is students from families with $100,000 in income pay far less than double the amount to college as the students from families with $50,000 income, which is what public policy wants to happen. We need to look more at this study, but it is a welcome addition to the literature on financing college.

The fact remains that consumers tend to overconsume things that others pay for, and that they are less price sensitive because of third party payments. This is probably the most important single reason why college costs are high-- and rising rapidly over time.