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Wednesday, January 8, 2020

ANALYSIS/OPINION:

Adam Smith famously remarked that people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in “some contrivance to raise prices.” The Trump administration has certainly been vigilant about such activities in the realm of higher education, as it recently began an investigation over the practice of Ivy League and other elite schools coordinating when to accept applications, announce financial aid decisions, and when to require a final decision with respect to enrollment.

Last month, the Justice Department reached an agreement that would end the group’s prohibition on recruiting students that have already accepted admittance to another school. 


However, the Justice Department can — and should — do much more to help reduce costs and allow less elite private schools to act together to reduce their tuition, something that the Obama administration’s Justice Department vigilantly sought to prohibit. 

Why collective action is necessary to reduce tuition takes a bit of explaining. For a non-elite private school, very few students actually pay the posted tuition. Nearly everyone gets some sort of scholarship based on their family income and a variety of other factors. These discounts can be substantial: For many middle-class students, the cost of attending a private college is often close to the cost of attending a public university. 

However, many middle-class families — especially those whose parents did not attend college — are not aware of this reality, and the high tuition scares them away from applying at any private schools. 

A school could potentially attract this cohort simply by reducing its posted tuition: It would lose some money from the 1 percent of students who pay full freight (that’s a typical fraction, by the way), but it would potentially offset this money by attracting more students from the ranks of the less-informed high school seniors put off by the high sticker price.

What’s to stop such schools from simply unilaterally lowering prices? Plenty, it turns out. While a school that cuts its tuition can expect to get a surfeit of applications in the year it actually makes the reduction, applications tend to decline in the ensuing years as families perceive that a tuition well below that of other, similar private schools must be an indicator of inferior quality or some sort of financial problem.

In subsequent years, applications invariably decline sharply for such schools and it more often than not finds itself in a death spiral of fewer students paying less in tuition. 

However, if a group of schools that regularly compete against one another were to reduce their posted tuition in concert, the quality perception issue becomes moot. 

While this collective action would serve to increase demand for private colleges and increase enrollment, the Justice Department interprets it as price fixing, even though in this instance the fixing is being done to reduce prices and benefit customers. No matter. 

And since these schools don’t have the friends in Congress that the Ivies do, common sense legislation that would fix this problem has gone nowhere. 

The Trump administration would be helping middle-class students if it either made this legislative fix a priority or else called off the Justice Department and determined that colluding in this instance to reduce prices is not, in fact, price fixing. In one fell swoop, it would be able to declare that it had struck a blow for lower college tuition. 

• Ike Brannon is a senior fellow at the Jack Kemp Foundation. 


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