The Freshman Fifty Thousand
“When I was 17 I went to get a Limp Bizkit tattoo and when they wouldn’t let me because I didn’t have a guardian’s approval, I cried and punched a lamp post. 3 months later I was allowed to take on $119,000 in loans to go to art school.”
@BillDixonish
A recent study estimates that the average listed cost, including tuition and living expenses, for private universities at $54,840 per year.[1] Facing numbers so huge, it absolutely falls on applicants and their parents to become educated consumers. Beware, because colleges love money, the stakes are high, and the rules of the game are just as peculiar and special as the college experience itself.
The cost and the value of college are hard to measure. Tuition is a nice, discrete number, but everything else requires estimation. There are the opportunities you forgo while in school. You might graduate with debt, which carries interest costs. Your future earnings power should improve, as should your available set of job opportunities. You will enjoy special experiences and meet all kinds of new people your own age. You should make friends who remain so the rest of your life. Choosing a college tests your own values across many dimensions. The results can be a financially devastating decision, especially when expensive tuition bills and the attendant student debt fail to produce a marketable degree.
For most of us, college is a special time when we suddenly become new people, no longer the property of our parents or the public school system. We are also free from the long list of mundane responsibilities that come with work and parenting—although we might not totally appreciate that aspect of the college experience in real time. It would be nice if this special experience could play out in a different dimension ungoverned by the laws of money and markets. Sadly, this is not the case. In the ivory towers, just like at the racetrack, money makes the mare go.
Ron Lieber has written about personal finance for the Wall Street Journal and the New York Times. His first book, The Opposite of Spoiled, was on teaching children to think about money responsibly. I enjoyed that book but stopped short of recommending it broadly to clients because I found its argument a bit meandering while, practically speaking, its target audience was more mainstream and less affluent than Provident’s client base.
Lieber’s new book is The Price you Pay for College, and it is about exactly that—higher education costs. It is also about what we should value when selecting a college. I would absolutely recommend this book to anybody with kids approaching college age. Even quite affluent people can get a kick in the teeth from the financial consequences around higher education costs. Those schools know how to get you!
To me, the book’s most interesting point is that merit-based scholarships are becoming an extremely common tool for attracting qualified students while simultaneously soaking more marginally qualified ones. It is not unusual for well over half a school’s incoming class to be given some kind of tuition discount via scholarship, with merit-based scholarships being the most common discounting tool. When most students get discounts, the ones who don’t are effectively paying a premium.
Lieber scorns the idea that one large swath of an incoming class should qualify for merit awards while another swath attending the same school at the same time should not. What he kind of dances around but never outright admits is that students who are admitted without a scholarship are simply being sold the right to attend in exchange for a high tuition.
The practice would not sound so bad if it were only less secretive, I think. Many colleges almost treat admission slots like salesmen treat cars on the lot. First, they get you interested. Then they work to extract the highest price. There is no “true price” except what the buyer can be made to pay above the dealer’s cost. Colleges are not quite as mercenary—they care about more than just money—but the buyers are also more innocent because they do not know how the game works. The absolute top schools can do things a bit differently thanks to their huge endowments and the perceived value of their degrees, although it seems like everybody plays the same game to some extent.
Hypothetically, it would be more honest and transparent if schools simply agreed to admit all comers subject to a tuition formula. They say sunshine is the best disinfectant, and exposing admissions price discrimination for what it is would make the system better overall in my view. You too can attend Selective University. Simply pay $100,000 annually, minus the product of ten times your GPA and your SAT score. The class fills up with top candidates who are subsidized by more marginal ones. You don’t bother applying to schools whose formula doesn’t work for you. It’s a fanciful idea, but I think we’d all learn to appreciate it in time.
Keeping the admissions game secretive and arcane probably drives costs higher overall. There is a perceived scarcity of admissions slots at selective schools, but in reality, the number of qualified candidates approximately matches the number of positions available. Obscuring the price tag simply makes it harder for students to make price-conscious decisions. Also, faced with two equally marginal candidates, schools are generally more likely to admit the one from the wealthier family. If both were strong candidates who qualified for tuition discounts, then both would be admitted. However, schools don’t want to admit students who can’t afford to graduate. It isn’t good for the school, and it isn’t good for the student.
The most selective school that accepted me 23 years ago was Duke in North Carolina. I had not yet returned my acceptance when Michigan came through with a scholarship offer that cut the total cost of attendance approximately in half. Suddenly, the higher-ranked, warmer weather Duke was also about twice as expensive. I chose Michigan, and I justified my somewhat mercenary decision by saying, “Hey, the scholarship proves Michigan wants me more.” At the time, I do not think I realized just how accurate that notion was.
Practically speaking, I was more valuable to Michigan than I was to Duke. Michigan’s undergraduate enrollment is almost five times larger and therefore less selective than a top-tier private school like Duke. The distance between my application and a waitlisted candidates was certainly greater at Michigan than Duke.
My two girls are 8 and 10 now. It’s amusing to realize my oldest is more than halfway to the age when she will probably leave home for college. She will be a different person by then, and I wonder what next step she will take. Will she want to get as far away from her parents as she possibly can? Will she be more of a homebody and stay within an easy drive? Will she have her heart set on attending an Ivy League school, or will she treat college as a lifestyle decision and find a school by a beach? I’m sure my wife and I will have opinions, but it will have to be her decision ultimately. Whatever her idea of a dream school may be, she will be made to consider the cost and made to shop around. If you simply go to the “best” school that accepts you, you may regret it financially.
Miles Putnam, CFA
[1] Hanson, Melanie. “Average Cost of College & Tuition” EducationData.org, November 18, 2023, https://educationdata.org/average-cost-of-college