Why Legislating Low Tuitions for State Colleges Is a Mistake
They Just Subsidize the Rich

By AARON EDLIN AND IAN AYRES

Thursday, Oct. 30, 2003

Congressman Howard McKeon is up in arms because many state college systems are dramatically increasing their tuitions in response to budget crises. New York's increase is 28 percent; California's is 30 percent; and Arizona's is a whopping 39 percent.

Upset at these increases, McKeon has sponsored legislation to withdraw federal money from those schools that have effected big tuition increases. He argues that increases are especially misguided when, in California, for example, "22 percent of students eligible for college can't even afford" the old tuition at the cheaper California community colleges.

It might seem that McKeon is obviously correct, and that raising state college tuition is plainly a bad thing. High tuitions mean students will find it harder to finance college -- and may not even attend, or may drop out due to costs. And for the students who attend state colleges, many of whom are of modest means, the tuition crunch may be especially painful.

Thus, it might seem that while one could take issue with McKeon's proposed solution -- because cutting off funds may only cause schools to cut important educational programs -- one can't disagree that increasing tuitions are a problem.

In fact, that is absolutely not the case. The truth is that increasing public college tuitions are not a problem at all. Indeed, the biggest problem in pricing tuition at public universities is not that the poor pay too much, but that the rich pay too little.

Tuition increases are actually a good idea -- as long as they are matched with financial aid, including scholarships, for poor students.

The Huge Gap Between Average Public and Private University Tuitions

Consider a comparison: U.C. Berkeley offers more courses taught by more Nobel Laureates than Yale. Yet Yale charges $28,400 per year in tuition and fees, while Berkeley charges $5858.

And this is no anomaly: Tuitions at public universities average $4,694 compared with $19,710 at private colleges. In short, public university tuition, on average, costs less than one-quarter of private university tuition. (And that is even in light of this year's public university tuition increase of 14 percent -- the largest in at least a quarter of a century.)

Who benefits from the low public school tuitions? A disproportionate amount of the benefits go to rich students who attend schools like Berkeley because of the way financial aid operates.

The Problem for Poor Students Is Low Financial Aid, Not High Tuition

What happens, then, when public university tuitions rise, as has occurred recently? Perhaps surprisingly, the situation becomes fairer.

The rich Berkeley student now must pay a tuition much more commensurate with what he or she can afford. And the poorest Berkeley student are typically not much worse off: As tuitions have risen this past year, those from the poorest families saw their financial aid packages rise almost dollar for dollar.

For poor students, then, the important issue isn't tuition, so much as financial aid. McKeon may well be right that students can't afford the fee increases at UC Berkeley. But if so, the answer isn't a tuition decrease; it's a financial aid hike.

Why Public Universities Should Continue to Raise Tuitions Even More

Thus, the member schools of the California system, for example, would be wise to radically increase both their tuitions and their financial aid.

For instance, suppose UC Berkeley raised its tuition by $20,000 per year, and gave all but it's richest students an extra $20,000 scholarship. With the extra money it got from its richest students, it could balance its budget. And, having done so, it would not need to burden students even from middle class families.

Berkeley's tuition would then be more comparable to Yale's (though still a little lower). But most students would still pay the same amount as they do currently. Only the well off would pay more.

Curiously, this approach would also have a side benefit for Berkeley: Its position in the U.S. News college rankings would shoot up, for U.S. News assigns higher ranks to schools that give more substantial amounts of financial aid.

Would Berkeley deserve this position increase? Absolutely. The bump up in ranking might seem to be the result of sleight of hand or subterfuge -- after all, Berkeley's increased financial aid would be required only because of its own decision to raise tuition.

But in fact, the change would only equalize Berkeley with schools like Yale, which currently get a ranking advantage using the very same "sleight of hand." That is, Yale chooses to charge a very high tuition, but then effectively waives a great deal of it through financial aid.

Moreover, Berkeley is already, in effect, giving lots of financial aid out -- but it goes to the wrong people, and it isn't counted in U.S. News ranking. Every affluent student who attends Berkeley, not Yale, in effect gets a $20,000 scholarship to do so. The current aid is just given in the hidden form of low tuition.

Looking at Financial Aid, Not Just Tuition, Is the Only Accurate Perspective

Once we focus on both tuition and financial aid, it becomes clear that Yale's approach is actually better than Berkeley's at ensuring fairness among students with different financial resources -- and that Berkeley, and other public universities might be well advised to follow Yale, at least to a point.

If you're still not convinced, look at it another way: U.C. Berkeley and Yale are selling similar products, but only one -- Yale -- charges a market price. Berkeley, in contrast, still gives a 75%-plus discount. And it gives that discount to rich and poor alike. California taxpayers ought thus to be angry: Their dollars are going to give even wealthy students what may amount, after four years of college, to an $80,000 subsidy.

It's time to move to a fairer, and more transparent, system. That system would charge higher tuitions that match or approach market rates. At the same time, it would also offer high financial aid packages for the deserving.

California voters have a right to be angry if they are, in effect, offering $80,000 subsidies to rich students. But if they are offering those or similar subsidies only to students who truly need the money, they can be proud that their tax dollars are going to equalize educational opportunity.

And with rich students paying higher, market rate tuitions, the budget problem at schools like UC could be solved. And that, in turn, might go a good way toward curing the California State budget crisis.

If the newly elected Governor Schwarzenegger plans to continue to be "The Terminator," the first target he should focus on is low tuition for rich students who attend U.C. schools.


Ian Ayres is a professor of law at business at Yale University and the author of Why Not?: How to Use Everyday Ingenuity to Solve Problems Big and Small.
Aaron Edlin is a professor of economics and law at UC Berkeley, where he has taught since 1993. To read more about the inequities in college financial aid, please see Edlin's article, "Is College Financial Aid Equitable and Efficient?" The Journal of Economic Perspectives, Vol. 7, No. 2. (Spring, 1993), pp. 143-158. Edlin worked for the Clinton Administration as a Senior Economist at the Council of Economic Advisers, covering industrial organization, regulation and antitrust in 1997-98, and has been a visiting professor and research scholar at Columbia, Stanford, and Yale law schools. He received his A.B. from Princeton and his Ph.D. and J.D. from Stanford.

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