COLUMN: $30K, and cheap at the price

From Michael Brus's, "Narcissist's Holiday," Fall '98 From Michael Brus's, "Narcissist's Holiday," Fall '98One of the most durable myths in America is that elite colleges are overpriced. Newspaper headlines, guidebooks and yuppie parents all scream the same thing: "Tuition hikes outpace inflation!" "Tuition hikes outpace growth in wages!" "Tuition requires a second mortgage!"From Michael Brus's, "Narcissist's Holiday," Fall '98One of the most durable myths in America is that elite colleges are overpriced. Newspaper headlines, guidebooks and yuppie parents all scream the same thing: "Tuition hikes outpace inflation!" "Tuition hikes outpace growth in wages!" "Tuition requires a second mortgage!" All true. But like the good, responsible parents they are, they diligently save every penny and, when junior reaches 18, they pony up their life savings to the college bursar. During the 1980s, for example, Penn's tuition increases began to outpace inflation by 200 to 400 percent, yet applications rose by more than a quarter. This decade, tuition increases have continued to outpace inflation, yet Penn is now more selective than at any time in its history. Because the consumers of elite higher education pay little attention to price, the producers of it don't either. In a Time magazine cover story last year, 1976 College graduate Erik Larson persuasively argued that Penn could easily lower its tuition by spending just a little bit more of its annual endowment revenue rather than re-investing it. "Penn, if it increased its [endowment] spending just two percentage points," Larson wrote in 1997, "could generate an extra $40 million, enough to reduce the tuition of each undergraduate by $4,000. Harvard? is in an even more advantageous position. A one-percentage-point increase in endowment spending would yield an extra $90 million, enough to cut its base undergraduate tuition nearly in half." It's worth noting that Penn, with a current endowment of $3 billion, and Harvard, with an endowment of over $12 billion, charge roughly the same tuition. And it's not as if these universities are loath to spend more of their endowments. Last week Harvard announced that it would spend significantly more of its endowment revenue -- but on capital projects. Similarly, University President Judith Rodin told Time last year that Penn would soon consider spending more of its endowment -- but again, on capital projects. Part of this reluctance to cut tuition can be explained by the fact the Ivies don't want to engage in price wars. Such competition would likely turn today's progressive, need-based financial aid system into a merit-scholarship bidding war for the well-to-do. Penn certainly does not forsee a bidding war: Associate Vice President Frank Claus told me that the priority of the University is not to reduce absolute tuition but to increase endowment principal, the increased returns from which will provide more grants for the poor. This bias toward the underprivileged at the expense of the upper-middle class is commendable, but it is only made possible by the absence of price competition in the market for elite schools. Actually, even if the elite colleges decided to become profit-hungry competitors tomorrow, they still probably wouldn't lower tuition, because it would drive consumers away. This seems perverse, but it's actually a part of traditional economic theory, called the "snob effect." On the first day of Economics 101, your professor probably drew a supply and demand graph on the board. The X-axis represented the quantity of goods, the Y-axis represented the price of those goods. For suppliers, price is directly proportional to quantity -- that is, merchants make more stuff when the price of that stuff goes up. For buyers, price is inversely proportional to quantity -- that is, shoppers buy more stuff when the price of that stuff goes down. These laws of supply and demand hold for most people most of the time. Every once in a while, however, shoppers would rather pay more for a given good than pay less. For example, a consumer might pay more for a name-brand drug than for a generic because it is perceived to be of higher quality, even though it contains the same chemical compounds. The same principle applies to colleges. With educational quality hard to measure precisely, parents often perceive a higher-priced degree to be a de facto "name-brand." What's more, these parents may be right. It has long been known, of course, that a college graduate will earn substantially more over his lifetime than a non-college graduate. But recent quantitative evidence indicates that the salaries of alumni from name-brand schools are even greater still. A recent statistical study of affirmative action by two Ivy League ex-presidents inadvertently spotlighted this trend. Though the report got a lot of attention for its demonstration that affirmative action had benefited minorities at top colleges, an underlying message was the extent to which those students reaped advantages merely from being there. One of the nation's leading experts on the increased-salary benefits of attending an elite college is Penn's Robert Zemesky, a professor of Education and director of The Institute for Research in Higher Education. His research shows that "the [high] cost of attending [an elite] institution pays off by providing a substantially greater probability that graduates will enjoy an above-average salary." By 2000, he says, he will produce a kind of U.S. News guide on colleges that will rate schools by a new measure: how their graduates fare after they leave school. If Zemesky can convince the public that today's astronomical tuitions are actually a bargain, perhaps those screaming headlines will disapppear. But I wouldn't bet on it.