'A Crazy Quilt of Discounting'

by Jonathan Robe

Mark Schneider had a rather good (though short) post Tuesday over at the The Enterprise Blog in which he noted that the rise in college tuition from the 2007-08 to 2009-10 academic years was roughly three times higher than inflation as measured by the CPI. This observation is not, it goes without saying, a new one. After all, historically, annual rates of increase in college tuition have routinely outpaced (even quite substantially so) the annual rates of increase in the CPI (see Table 1-1 of Going Broke by Degree, for data on the 1979-2003 period).

What's even more interesting (and disturbing), though, is that since the start of the recent recession (during a time when household incomes experienced a sharp decline), the annual rate of increase in college tuition slowed only slightly: growth went from 6.4% in 2007 to 6.3% in 2008 to 5.9% in 2009 to 5.8% this past year.* Basically, what Schneider notes is that while students and their families' ability to pay was decreasing (in real terms), the real price of college was increasing.

Of course, as Schneider also notes, one of the primary ways in which colleges try to mitigate this fundamental disconnect in pricing is through price discrimination. (Because Schneider restricts his discussion only to institutional grants, his graphs understate the extent of price discrimination for students). Nevertheless, even looking only at institutional aid reveals college pricing to be the mess that it is:

This crazy quilt of discounting creates a complicated pricing system that is hard for anyone to understand—and probably benefits nobody, except perhaps colleges and universities.... [W]e have no idea how many students are scared off from applying to college by the high and ever-increasing tuition that schools post, and we are yet to find out how well schools do in displaying their net price and how much such information will affect student choice.

*To compute these annual rates of increase, I took the May-to-May percent increase in the college tuition and fees index numbers reported by the BLS.