Harvard: Benevolent Benefactor or Penurious Price-Gouger?

Samuel Eckman

Harvard made headlines late last year when it announced a sweeping reform of its financial aid disbursements, increasing assistance to middle class families which had previously been largely ignored by such elite institutions. The reform included a measure ensuring that all families earning less than $180,000/year would pay no more than 10% of their annual income, a transition from loans to grants, and the elimination of home equity as a factor in determining the aid a student will receive.

The announcement has been a PR boon for Harvard, which has received praise from the New York Times, Washington Post, and Mother Jones, among others. In the time since, other exclusive schools have rushed to keep pace, with the most recent overhauls coming from the University of Pennsylvania, Yale, and Stanford. Yet, while the other news outlets were piling high the praise, the Wall Street Journal saw through the hype:

Drew Gilpin Faust, the school’s new president, said the policy is designed to help families facing “increasing pressures as middle-class lives have become more stressed.” Before applauding Harvard’s altruism too loudly, however, readers should know that the school also had its back against a wall. In September, Republican Senator Chuck Grassley held hearings on whether colleges should be forced to spend a higher percentage of their endowments each year.

With the Senate Finance Committee breathing down their necks, it should be of little surprise that universities are so eager to open up their purses to aspiring students. Grassley began investigating how universities spend their endowments last year, toying with the idea of stripping the schools of their endowments’ special tax-exemption if they failed to spend at least 5% each year. (A similar requirement applies to non-educational non-profit foundations; see Posner’s explanation of why the analogy does not hold). In short, they have seen the Ghost of Christmas Future, and are emerging from their slumber to a Scrooge-like change of heart.

The pressure from Congress was clear enough, however, and even admitted by Ms. Faust (a hilariously appropriate name for a Harvard president, but I digress). As the WSJ article points out, the real problem is the existence of government handouts for education. By constantly increasing tuition aid to college students (in what amounts to a corporate welfare racket on par with monthly kickback checks to Halliburton), students are no longer incurring the costs of college, and so there is no check on university’s tuition hikes:

Ironically, these government handouts are creating the tuition problem. Tuition has risen about three percentage points faster than inflation every year for the past quarter-century. At the same time, the feds have put more and more money behind student loans and other financial aid. The government is slowly becoming a third-party tuition payer, with all the price distortions one would expect. Every time tuition rises, the government makes up the difference; colleges thus cheerfully raise tuition (and budgets), knowing the government will step in.

A well-stated argument, overall; the article merits a full read. But I’d like to posit another, less feel-good explanation for elite universities’ “generous” restructuring of their financial aid. As anyone that is familiar with the college application process, the role of rankings such as US News & World Report’s is pervasive. And just like high schoolers pad their resumes to look good for all the elite schools, the elite schools send all the right signals back.

To wit, Harvard has steadily raised tuition, a ubiquitous trend at colleges and universities across the country. On the one hand, this is due to an increasingly higher volume of applications being received. But also, raising tuition sends a signal of higher quality to parents and students who have no comprehensive understanding of a school’s teaching and research credentials. These increased revenues are then essentially rebated to students in the form of increased financial aid, resulting in little net change in cost, but sending a positive message to prospectives: “This school is on the rise, and we want you to be a part of it.”  As the NY Times reported last December:

The recognition that families associate price with quality, and that a tuition rise, accompanied by discounts, can lure more applicants and revenue, has helped produce an economy in academe something like that in the health care system, with prices rising faster than inflation but with many consumers paying less than full price.

Average tuition at private, non-profit four-year colleges — the price leaders — rose 81 percent from 1993 to 2004 , more than double the inflation rate, according to the College Board, while campus-based financial aid rose 135 percent. When one adds that to the fact that the only thing rising faster than tuition is the expected future benefit of a college education as measured by income, health, and other measures — a new view of this “crisis” begins to emerge.

Meanwhile, increasing aid means increasing an applicant pool without increasing the class’s seats. The result: greater selectivity, one of the biggest factors in determining those omnipresent college rankings. The more applicants a university turns away, the higher it moves in the rankings, and these rankings are the push-up bra of the college-student courtship ritual.

In short, the government’s tuition aid programs artificially inflate the price of college. This is exacerbated by a marketing theory that encourages universities to increase tuition while increasing aid at least as much, enhancing the perceived prestige of the school while simultaneously allowing students to feel more privileged and wanted when offered what seems to be a generous break on tuition. Meanwhile, the increased number of applicants this process results in more rejections, thereby raising universities in the rankings.

Of course, maybe Harvard really is super-nice.

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