Arnold Kling  

Greed and Price-Gouging

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Robert M. Dunn complains,


The disparities in college endowments are enormous. As of mid 2004, Harvard, Yale, and Princeton had average endowments of $14.9 billion, while three private institutions of similar size, George Washington University, Georgetown, and American University, averaged $543 million. That is a ratio of 27:1--about the same difference in income between a successful investment banker and a Wal-Mart clerk.

The numbers are even more striking in small liberal arts colleges. Grinnell, the richest of those that report data publicly, had an endowment of $1.2 million per student. Annual earnings of just 4 percent would produce more than $46,000 per student in yearly interest. Why does Grinnell charge tuition?


A case could be made that the biggest source of inequality in America is our system of collegiate gift-giving. If people made their donations to generic funds that provided student vouchers, rather than giving their gifts to specific colleges and universities, that would probably be much less of a rich-get-richer scheme.


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COMMENTS (11 to date)
cure writes:

What's strange is that the *colleges* don't recognize this. Assume a school ranked 5-10 switches to "free tuition room and board if you're admitted." Who is choosing Harvard at 40k over Penn for Free, or Williams at 40k over Pomona for free? I think a school like Columbia or Pomona could easily vaunt to the very top of the American college list with such a plan, if they also endowed a few top chairs at the same time. The draw for internationals would be even stronger - right now, it's Tsinghua at 2k vs. Columbia at 40, but Tsinghua at 2 vs. free Columbia is a deal anyone will take.

Mike writes:

This probably could go unsaid, but institutional development offices work long and hard cultivating relationships and trying to strengthen an institution's identity in the eyes of alumni, foundations, corporations and parents. The gross volume of giving would almost surely be lower under a generic scheme.

In regard to why Grinnell, Williams, etc. is not free, for many of these colleges (the data is somewhere on my machine), the actual costs of educating students far exceeds the per student endowment payout. So, even for students that are paying full tuition, the schools are subsidizing their educations by a fairly substantial amount. Princeton, who is the richest school by a long shot, has made moves to eliminate all student charges for certain subpopulations of students, which will force its competitors to follow suit. This all takes money and is yet another reason why we will continue to see endowments grow. Charging nothing for tuition would lead to lower future per student expenditures, and in the long run hurt a college's ranking, which among other things explicitly credits a school for spending more money.

Cheers,
Mike

cure writes:

Mike, I just don't think that's true. The largest endowments are on the order of 1m/student+. It's clear that the annual increase in endowment at many of these schools is well more than the total tuition payment.

Further, consider that no tuition = better quality students = higher earnings after graduation (presumably) = higher donations. There's some sort of feedback loop, isn't there?

Dan Landau writes:

It is good to see us economists finally talking about the cost of higher education. However, the issues are much more complicated than tuition and endowments. The important issues that need to be addressed include the huge wastes in university operating costs, the opportunity cost, not just money cost, of higher education, and the university as a sleep away camp between high school and employment.

Andrej Salner writes:

I thinks there are at least two parts to the answer to the question of why these well-endowed colleges still do charge tuition.
To me the most obvious is economic rationality: why give away places for free if you can fill them up with students of adequate quality who pay. The top universities probably do not have to significantly compromise quality of students with little "quality/ability to pay trade-off" at the peak of the qualified and wealthy population eager to attend these schools.
Secondly, the rate of tuition is most likely a somewhat arbitrary figure - I do not think it is necessarily directly tied to average per student costs. Again, it would be economically sound to charge not only in relation to average cost but in relation to marginal cost and also to demand. The average cost per student could therefore be significantly higher than even full tuition fee.
As far as the argument of competitive edge arising from charging no tuition, this must be weighed against the contribution to whatever the institution is maximising of a. more current spending, b. more investment spending, c. long-term security arising from growth of endowment.

spencer writes:

Actually, the bulk of the people that pay full tutition at Harvard are foreign students.

So make your donations to Berea College that turned up in your data base the last time you
talked about this.

jt writes:

no tuition = better quality students = higher earnings after graduation (presumably) = higher donations

I almost don't want to post this because it's so cynical, but I think it's the truth ....

actual equation is

high tuition = wealthier families send students = higher earnings after graduation (presumably) = higher donations

Paul N writes:

1) Donors to universities like to feel like the students are paying their share, too. Harvard would get far fewer donations if they made tuition free for undergraduates, though they could easily afford to do so, because donors would feel like a) students have it too easy - why should I give my money when they give nothing and b) maybe Harvard doesn't really need that much more money if it's already free for undergrads to go there.

2) Another reason to charge tuition is because it's felt that if students don't pay anything to go to their college, they won't try as hard, because they won't value the product they're getting.

3) People often forget that undergraduate education is, for well-endowed research universities like Harvard, Princeton, Caltech, MIT, a small fraction of overall revenues/costs. Yes the endowment may be $1M per student, but look at how many grad students, technicians, professors whose research must be funded for each undergraduate student. And if you choose to stop doing groundbreaking research, you'll quickly lose your status as a university.

4) There's no real mystery why the giving is so asymmetric; people generally give money to their alma mater, and the people that go to the best colleges typically end up the richest, whether you believe that's because they were smarter in the first place, or because the school really taught them better and the social networks you form at these schools pay off later in life. Also, I would guess that the returns in terms of research productivity, etc. are higher at better universities.

Bob writes:

I can't believe we're debating a tongue-in-cheek post. The point isn't that schools should start pooling gifts, the point is that pooling gifts has costs (as has been pointed out) and is, despite certain attractions, a bad idea; AND, if faculty are so quick to recognize this, why don't faculty recognize the same effects in the rest of the world? Cognitive dissonance strikes again!

greg writes:

Wouldn't free tuition be the ultimate price control?

Why wouldn’t free tuition lead to a higher student to teacher ratio effectively which would lessen the quality of education?

Wild Pegasus writes:

Who is choosing Harvard at 40k over Penn for Free, or Williams at 40k over Pomona for free?

Who the hell is choosing Harvard over Penn now?

- Josh, loyal Quaker

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