November 12, 2014

Why Don’t Colleges Lower Their Prices?

High cost doesn’t always equal better quality, but many people think that way.

Why do colleges charge so much money?

The simple answer to that question is because they can. Here are three reasons they don’t lower their prices, and how you can begin to change the higher education industry.

1. Lower Cost = Lower Quality

Or at least, that’s the way that most Americans perceive higher education.

The most prestigious schools in the country charge a price tag to match. All the schools in the upper echelon are priced accordingly, and schools who are trying to build their image often increase their prices to match top ivy-league schools. The quality of the school is perceived to be great because the price is so high.

Sandy Baum of the Urban Institute says.

“There’s certainly evidence that people don’t know how to measure the quality of a college education … They think that if it’s expensive it must be better. I don’t think colleges want to have high prices, but I do think they see strategic reasons why it may be in their interest to have high prices.”

2. Supply & Demand.

One basic reason colleges can get away with charging such high prices is that people are still willing to pay them.

Over 21 million students are enrolled in different types of colleges across the country, and many universities turn away more students then they accept. As long as people are willing to pay the high prices of college, they will continue to charge high prices.

Recently some colleges have seen steep drops in enrollment and as a response drastically lowered tuition. For most of these schools, the tactic worked and enrollment has increased. Some colleges have also taken other cost-cutting measures, such as eliminating low-interest departments.

3. Government Loans & Grants Incentivize High Prices

Grants and low-interest loans are supposed to make college more affordable, right?

Well, think again. Colleges know that the majority of students will have an easy way to come up with money (even if it’s money they have to pay back). Thus they can easily raise prices knowing students will just apply for more loans to pay for them. Without the easy access to college loans, students would be forced to choose lower-priced alternatives or simply demand lower prices, and colleges would have to follow suit.

The theory that more federal aid drives up college tuition prices is known as the Bennett Hypothesis. In an interview with the NY Times, Bennett says…

If the federal government gives money, tuition goes up. If the federal government doesn’t give money, it goes up. Now, I think the availability of federal funding drives it up more quickly and more surely. Federal student aid makes it easier for colleges to do what they’re going to do anyway, which is raise tuition. There’s more money available.

Federal loans were meant to help poor students achieve an education that would lift them out of poverty. Too often today they serve as a way to hold college graduates back from economic milestones such as getting married, starting a family or buying a house. Sometimes the fear of debt can keep students out of college altogether. One study found that debt above a certain level was associated with higher dropout rates ($12,711 for men and $14,682 for women).

What Do We Do?

Bennett suggests that there is still a place for the government to offer aid in the form of grants for very low-income students, and that school eligibility for student aid should be linked to default rates and tuition increases. Surely making colleges more invested in the success of their students is one place to start increasing the value of college.

Aside from public policy, there is a more immediate way you can change the higher education industry, and that is simply by voting with your dollars. If more and more families put their dollars behind universities that are making an effort to reduce costs while at the same time increase educational quality, more colleges will change their ways.

Whether college pays off for your child depends on many factors, including how affordable the school is, what major they choose, if they are able to graduate on time (or at all) and more.

Unsurprisingly, not all colleges are equal when it comes to ROI. Perhaps more surprisingly, some schools actually have a negative ROI after taking into account the costs of attending.

The real test is whether the higher wages are enough to offset the investment in time and money associated with college. By that standard, college education does not look nearly as good. In fact, the financial return from attending many colleges actually appears to be negative. (Cappelli, Will College Pay Off? A Guide to the Most Important Financial Decision You’ll Ever Make)

How Do You Ensure a Good Return on your Education Investment?

Every financial decision has some element of risk involved, but there are some things students and their parents should be aware of before choosing a college.

There are some things you can do today to get a better return on your education investment.


1. Beware of Excessive Debt

Using loans to pay for college is very risky because there is no guarantee of a high-paying job for students to immediately begin paying them off. Once the interest begins building on loans, it creates a snowball effect that is difficult for many new graduates to keep on top of.

Many people rely on loans, and they aren’t necessarily bad, but they can be very quickly overdone. The best advice for students is to steer clear of programs or degrees that would require them to take out private loans which typically have higher interest rates.

2. Graduate On Time

The majority of students take more than four years to graduate if they graduate at all.

Choosing a school where a large number of students graduate “on time” is one of the first things you should be looking for. This also means a seemingly well-priced school isn’t really so well-priced at all when you see that only 17% of students graduate in four years.

3. Choose the Right Major

Many students and their parents try to analyze the job market or take average salaries into account when determining what to choose as a college major. It is wise to consider all the data you have, but it’s difficult to predict future job markets.

So what is the right major to choose? Think about the long term, and opt for a degree that will teach you transferable skills and stress critical thinking. If you think you might transfer majors, make sure there are plenty you are interested in to choose from.

College Factual has a free tool that will help you choose a major based on your natural strengths and interests. This means a degree that will capitalize on your strengths giving you skills to aid you in lots of career paths. Find your major now.

Is the Current State of Higher Education Sustainable?

Parents and students should arm themselves with information in order to make the best choice possible, but we all should be concerned about the current state of our economy that makes a college degree so necessary, but also prices it out of the reach of the average American.

Just because there are high returns on a college degree today, does not mean there will be tomorrow. And it is foolish to think every student has to get a four-year degree in order to be successful.

College Factual envisions a future where data on higher education outcomes is transparent and easy to obtain, and where every student is able to go to their best-fit college without boat-loads of debt. Will you join us?

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