Let the marketplace set higher education prices

Economics 101: The marketplace sets prices that balance the interests of those buying and selling a product; price controls don’t work; consumers are rational. Seems like our politicians and the media either didn’t take or forgot Economics 101 when it comes to public higher education.

State policy makers have moved from a bad idea, jawboning Michigan public universities to hold down tuition, to an even worse setting tuition caps and the media is constantly writing that Michigan parents and students are being screwed by too-high tuition at Michigan’s public universities. (Neither policy makers nor the media seem to care about even higher tuition and tuition increases at our private universities.)

For those interested in why college costs for in-state students at Michigan’s public universities is so high read the recent Bridge feature story. The primary reason – as they document – is state budget cuts to higher education over the past decade. Leaving Michigan in the bottom five in terms of state support per student.

What I want to focus on in this post is the issue of whether higher education – even with seemingly high tuition – is worth the costs or not and who should determine that value proposition: customers or government. The Bridge article features two cousins, one at the University of Michigan Ann Arbor paying $16,888 per year and the other at the University of North Carolina Chapel Hill paying $8,423. They describe the difference as a college user tax paid by Michigan families.

The assumption is that UM and UNC provide basically the same education. Back to Economics 101: the marketplace is telling us something very different. Non-resident tuition and fees (Bridge uses more than tuition and fees in their cost calculations) at UM Ann Arbor for incoming freshmen is $18,794 per semester, at UNC Chapel Hill it is $13,416. These prices are set by supply and demand based on paying customers – from anywhere on the planet – determination of what they get for their money from the two universities. Customers are telling us that UM Ann Arbor is worth a more than $5,000 (30%) per semester premium in price over UNC Chapel Hill.

Incoming in-state freshmen at UM Ann Arbor pay $6,220. A more than $12,500 (more than 65%) discount from the market price that students and parents from across the globe are standing in line to pay. Remember that UM Ann Arbor is turning away thousands each year who are willing to pay full price. For any other consumer purchase this would be considered a deal of the century price, not a tax! (Think buying a $50,000 luxury car at $17,500. Good deal or tax?)

And not only do in-state students get a huge discount from market prices they also are getting a terrific investment that pays high returns for a career (something like 40 years). As a recent Brookings study documents higher education is a far better investment than stocks, bonds or owning a home. Its not even close. As I wrote in a  previous post, this is even true if one has to take out substantial college loans:

… taking out loans for college is a good investment. And for those who are dedicated to getting a college degree is a far better option than not going to college because they cannot afford the tuition. Somehow as a society we have decided that college loans are a burden but taking out a loan to buy a home is a good investment. We urge new college graduates to buy a home at the same time that we bemoan the so called crushing burden of college loans. … Now there is evidence (the Brookings study) that not only is that not true, but that college is a better investment than stocks and bonds as well.

Should Michigan policymakers increase state aid to higher education and therefore increase the in-state discount?  Of course. We strongly believe the state should reverse the more than a decade of disinvestment in our terrific public higher education system. We have argued for years these cuts are stupid. How we could have fallen to the bottom five is mind boggling. College attainment is not only the single best predictor of individuals economic well being but also of state prosperity. It certainly is one of the keys to returning Michigan to prosperity.

But a lower in-state discount (its around 75% at UNC Chapel Hill) is not a tax.  And certainly not a justification for price controls. Back to Economics 101. Price controls – tuition caps – long term will lead to one of two results, both harmful. For those institutions with more demand than supply, they will take more students from outside of Michigan. For those who do not have waiting lists of students willing to pay market rates, they will reduce quality.

The basic lesson we need to learn is that in a highly competitive market place like higher education – there are thousands of choices at all price points and quality varieties – prices are set most efficiently by customers, not government. Customers are far better at figuring out what price is a good value and what isn’t than government.

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