There are few instances more annoying than finding that the person seated next to you on an airplane paid half the fare you did for the same ticket. Airlines have developed sophisticated programs that allow them to optimize ticket income. By doing so, they can fill the planes and extract the highest possible price from each passenger.
The pricing policy is reasonable because every empty seat on an airliner is lost revenue. Therefore, airlines do what they can to sell every seat — even if tickets are priced disproportionately.
It is easy to see that some of the same thinking about airline pricing has gone into President Obama's new plan for college tuition. He wants to fill classroom seats for the right reason — the president wants more students to have the benefit of a college education. His plan would increase funding for Perkins federal loans, but would take money from colleges that fail to inhibit future price increases regardless of their past track record in controlling costs. The plan will also rightfully focus on outcomes, such as degree-completion time, and will try to force tuition prices to lower levels. However, the plan is based on a college pricing system that is more complex than that captured in the president's proposal.
Like airlines, colleges have high fixed costs. Just as airlines must pay for planes, fuel and a myriad of employees, colleges must pay their faculty and staff, maintain facilities and add new buildings. And like airlines, colleges have various sources of income, including tuition, room and board, various fees, contributions, and — in the case of state-owned or related institutions — direct taxpayer subsidies.
Unlike airlines, colleges try to allocate classroom seats not just on the basis of price, but rather on a student's academic proclivity and ability to pay. No airline would sell tickets based on a family's income, but that's exactly what colleges do with tuition. Every year, families that are otherwise unable to pay for college are eligible for federal and state student aid and apply for financial aid from the college. In addition, private colleges offer aid that far exceeds the total of federal and state aid combined. Last year, Pennsylvania's private colleges provided more than $1.4 billion to students.
College aid differs for each student, depending on the student's financial circumstances and academic ability. As such, one student who receives the same curricular, co-curricular and extracurricular benefits of attending college may pay less than another student who, because of their higher family income, doesn't receive the same amount of aid.
All private colleges and some public ones use gifts and endowments to help cover the cost of financial aid. However, except in the case of a very few select and well-endowed institutions, most of the financial aid that students receive comes from the reallocation of funds from families with greater financial resources to those with fewer. This scenario places these colleges in an awkward position. They are, in essence, helping those in need by charging more to those who can pay more.
The cost of a college education certainly has risen faster than the consumer price index, but much of the increase reflects the growing need to take some tuition revenue from those who can pay more and give it to those who cannot. This financial aid practice has been hard on private colleges in particular. Their tuition is higher because, unlike public universities, they receive little or no direct taxpayer subsidies. Furthermore, state-owned universities give students the same subsidy regardless of their ability to pay. As a result, taxpayer dollars may be used to subsidize wealthy families that could very well pay for a majority of, if not all, of their children's tuition.
A key factor in driving college costs for families is the time it takes to graduate. Current financial aid systems give little or no incentive for colleges to graduate students on time. It's hard to believe, but less than 40 percent of the incoming freshmen who matriculated to the nation's colleges last September will graduate in four years. Poor advising, inefficient class scheduling and a lack of incentives to finish on time have elongated the time it takes to graduate. This phenomenon has been most pronounced at large, state institutions. You wouldn't continue to buy an airline ticket that assures you a less than 40 percent chance of getting to your destination on time, would you? The president's plan for higher education does contain incentives for states and institutions that graduate more students on time — particularly those with lower family incomes.
President Obama's plans for higher education address some, but not all, of these issues. Colleges, particularly private ones, are helping students who are unable to pay by granting them student aid which, in essence, discounts tuition. These efforts are somewhat stymied by policies that continue to distribute scarce dollars to families regardless of need and to institutions that do not graduate students on time. Until these issues are addressed, tuition will continue to rise.
Funds that are available for college should be given directly to students, not to colleges or universities, and be based on need. Federal and state support, whether it's through direct grants or low-interest loans, should also be partially based on the on-time graduation rates of institutions. Only then will higher education be accessible and affordable for all.
Michael A. MacDowell is president of Misericordia University in Dallas, Pa., where he occasionally teaches economics.