The Daily - The College Pricing Game

Episode Date: September 14, 2022

When President Biden canceled college debt last month, he left untouched the problem that created that debt: the soaring price of college.In the 1980s, the list price of undergraduate education at a private four-year institution could hit $20,000 a year. At some of these schools in the last couple of years, it has topped $80,000. Why has a college education become increasingly costly, and why has that become such a difficult problem to solve?Guest: Ron Lieber, a personal finance columnist for The New York Times and author of “The Price You Pay for College.”Background reading: Instead of making higher education free, the United States subsidizes it later through repayment plans and attempts at debt cancellation. The complexity is disrespectful, Ron Lieber writes in his “Your Money” column.Also from “Your Money”: Student loan borrowers don’t deserve “forgiveness,” they deserve an apology. For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

From The New York Times, I'm Sabrina Tavernisi, and this is The Daily. When President Biden canceled college debt last month, he left untouched the problem that created that debt, the soaring price of college. Today, my colleague Ron Lieber on why that problem is so difficult to fix. It's Wednesday, September 14th. So Ron, after we did an episode on President Biden's plan to forgive student debt for millions of Americans, one of our producers raised a question at our morning meeting, which was, why has the price of college risen so dramatically? And it got everybody on the team theorizing. But no one had a definitive

answer. And so we decided to call you. You're a personal finance columnist for the New York Times, and you've written a book about this. So tell me, why is college so expensive? Well, there's a complicated answer to this, even though it seems like a pretty simple and straightforward question, but I'll do my best here to try and boil it down. So look, it's absolutely true that the list price, the retail price of college has gone up over time. In the 1980s, if you went to a private four-year residential undergraduate education, that's what we're talking about here, that was maybe $20,000. That's kind of where it topped out. And then it just sort of grew over time. In the last couple of years, some of these

private schools have topped $80,000. And that's for a single year, right? For tuition, room and board, all the fees. Yeah. And if we're talking about public four-year colleges back in the day, in the 80s, even in the 90s, in some instances, you could go to the flagship state university in your state and probably work your way through working, let's call it 15 hours a week during the school year, and 40 to 50 during the summer. That's not really possible anymore. In a lot of states, the per year cost of going to these undergraduate institutions, state universities, has topped $30,000 all in for the list price, right? So this can cost you $125,000 for four years, maybe even more. At a public school?

$125,000 for four years, maybe even more. At a public school? Yep. So these numbers are just astounding, right? I mean, $80,000 is just an incredible amount of money. Help me understand what's going on here. So there are a bunch of things driving this. First of all, let's talk about so-called administrative costs. They're going up, and they're going up for a couple of reasons. Over the last couple of decades, we've seen more regulations governing how these institutions run themselves.

And we've seen changing and growing demands from parents and families. from parents and families. And what both regulators and families want is that they want kids of differing abilities to have access to dorms. They want kids with mental health challenges to have ample opportunity to see a counselor without waiting three weeks. They want young women students to have equal access to the athletic fields and other facilities. So all of this requires more people to make sure that these campuses and these schools are behaving in a fair and equal fashion. And this is something that parents want. This is something that people in government want.

But in order to do it, there need to be more people. And those people often have advanced training. And if you've got an advanced degree, you usually earn more than average. So colleges have gotten a lot costlier to operate in the last decade or two. Exactly. But then there's an additional element of this too, right? Aside from the administrators. And again, let's be clear here, it is people that cost the most, right? This is the biggest line item on these budgets. But then the schools have to build buildings and maintain them. So often you hear about these so-called amenity wars. Now, some of this is wildly overstated and it's used as a, you know, sort of symbol to knock institutions down.

There really are not a lot of climbing walls on American colleges and university campuses, right? And they're not actually that expensive to build or maintain anyway. That's a distraction. But it is true that a lot of families will compare schools. This is a marketplace after all. And they are looking at things, you know, above and beyond what the quality of the undergraduate education might be. So these campuses, right, they'll want to know which institution has a decent gym because exercise is important. And is there a good common space for people to study? Is the on-campus housing comfortable, right? So people blame the colleges for building, building, building, borrowing, borrowing, borrowing, and then charging more money. But when you ask them about it, they sometimes

point the finger back at parents, parents like me, right? They say, okay, well, this is what it takes to draw in these students. So we're going to spend on these facilities. And then some of that gets passed down in the form of higher tuition. Okay, so you've talked about the amenities that are expensive and also services like mental health counseling. What are the other drivers of increasing costs? So those administrative costs and the costs of new buildings, those apply to all sorts of schools. But there's something specific that applies to public universities. So once upon a time, a pretty good chunk of their budgets came from subsidies from the state legislature.

But when states run into fiscal trouble, and there was big trouble in 2008, 2009 during that giant recession, they cut the subsidies and the schools had to raise tuition in many instances. Now, some of those subsidies have been restored, but there are still many instances at all sorts of state universities where the list price is higher than it used to be. the list price is higher than it used to be. Okay, so, so far, this sounds pretty straightforward. But when does the story of college prices and how much we pay for our kids to go to college get complicated? Well, so far, we've been talking about the list price, the rack rate, right?

The price that you see in the school's brochure or on its webpage under,-unquote cost of attendance. But as it turns out, that's not what most people actually pay. What do you mean? Well, here's what happens. After you get in, you get this letter in the mail that tells you what you will actually pay. It's really more like a price quote. If you've applied for financial aid, it's really more like a price quote. If you've applied for financial

aid, it's referred to as an award letter. And that tells you what sort of discounts you'll get. Many students get some sort of financial aid from the school, and that takes the sticker price down to whatever it is that they will actually pay. So we're going to call that the net price, not the list price, but the net price. Okay, so there's a list price. That's like the thing you see in the shiny brochure. But that list price is usually higher than what students actually end up paying. So in a way, the list price isn't the real price. That's exactly right. And again, we're talking about the list price isn't the real price. That's exactly right.

And again, we're talking about the net price here. And at public colleges and universities, it hasn't gone up anywhere near as quickly as that sticker price has, the list price. And with private colleges and universities, it has barely budged over the last 15 years. Really? That's really surprising to me because, you know, the sticker price, the thing that's going up, I thought that was basically just the price everybody was paying, that that was what people were dealing with. So how does this even work? Well, probably the best way to answer that question is through a little bit of storytelling. And let's break these schools up into three categories. And again,

right, this is not representative of all of higher education. We're talking about residential undergraduate education, mostly for teenagers here, right? So let's start with number one, which is the super selective or rejective, depending on the term you want to use, institutions that get just a ton of applications because a lot of people really want to go. So at Yale, they accept something like 4% of all students. Lots of people want to go to Yale. And when lots of people want to go to Yale, they can charge more or less whatever they please because a lot of people are going to be willing to pay for it.

Okay, so does that mean that at schools like Yale, most students are actually paying the sticker price? Well, it's not most of them because Yale and schools like it would like to have a relatively diverse population of undergraduates. So maybe just under half at Yale and schools like it end up paying the full price, the sticker price. Everybody else pays less. So Ron, the students who aren't paying the full sticker price, how are they paying? You said half are in that category, right? Well, they get what's known in the trade as need-based financial aid. And this is a discount based on your ability to pay. You fill out some forms, you give away a bunch of financial information. And if you earn roughly, let's call it 250,

maybe $300,000, it depends on the family, Yale will give you at least a little bit of a discount. And then it gives you a price quote accordingly with a discount that the school has determined is appropriate for you. Okay, so if half the students are getting this financial aid that you're describing, and the sticker price has really been rising, then it stands to reason that the schools have probably been upping that financial aid, right, for those kids? Yeah, generally schools in this category are giving more discounts away, more financial aid, and often they're doing it for more people. And how exactly are they doing that?

I mean, where's all this money coming from? Yale and schools like it have gargantuan endowments so they can afford to be generous. Okay, so this is the story of these highly selective schools. They're offering more kids, more financial aid. And that sounds to my ear like one of the reasons why the net price probably hasn't moved all that much. Yes. As for the other two categories of institutions, they only wish that they were this lucky to be as rich and to have endowments this big. And because they're not, and because they have fewer students chasing the opportunities to go there, they need to play a very different kind of pricing game. We'll be right back.

So, Ron, we talked about the highly selective schools. Now let's talk about the second category. Tell me about those schools. Sure. So this is a much bigger category. There are more schools. There are more students. But the catch here is that for each of these institutions, there are fewer people who want to attend.

They can't be as selective. people who want to attend. They can't be as selective. And when you have less market power in that way, you have to change the way that you set your price. And so what's happened over decades now is that these schools, one by one, and then suddenly it seemed like all at once, were changing the way they did things. And the most recent example is also in Connecticut, Connecticut College. So what happened at Connecticut College? Tell me about that. Connecticut College, small, liberal art school. It accepts 38% of its students.

So that's nowhere near as selective as a place like Yale. But still, it was charging a similar list price. So that's around $80,000, including room and board and everything else. Yeah. So several years ago, Connecticut College has a problem. There were an increasing number of students who were either not applying in the first place or they were saying no when they got in. And so Connecticut College has to figure out why that was. And basically what they learned was that people wanted to go to school in a city or they wanted to go to a school that had more pre-professional majors or they wanted to go to a school that cost less. students. And that was in part because the price they were charging for what they were offering didn't work for families anymore. Like students were basically voting with their feet. That's right.

Okay, so what did Connecticut College do? Well, it decided to start offering a kind of financial aid that it had never offered before. So let me explain what that is. So as we did with Yale, we usually think of financial aid as aid based on need, what you can afford to pay, right? So Connecticut College still does that, but then they started doing something new as well. They were offering extra money as a kind of sweetener to come to Connecticut College over other schools that they might have been weighing. Extra money. So kind of like a bribe? Well, I mean, kind of.

So this aid, it has a name. It's called Merit Aid. It has a name. It's called Merit Aid. And it actually started back in the 1980s and 1990s. And it was called Merit Aid because at that time, the aid was based on a student's academics. These schools were effectively trying to buy better students away from competitors. But since then, it's grown a lot, right? Because if your competitor starts to do that, you sort of have to do it as well to match. And then you're in a situation where each successive school also feels like it has to do it. And now all sorts of schools, like nearly all of them, have to do some form of this for many students. So basically what happens is that in some cases, people who could actually afford to pay the full price, maybe they don't think that $80,000 is worth it for Connecticut College and hundreds of schools like it anymore. And so these schools essentially throw money at them, discounts, to get them to attend. So wait, families who can actually afford to pay are getting discount? Does that mean that

there's less money then to go around for families who can't afford to pay? Well, this is a question that has lots of answers depending on who you talk to. Logically, you would expect that there's only a limited pool of money. And if you start giving discounts to people who are affluent, there isn't going to be money for people who are low income. Now, some schools say with a straight face, and I believe them to many extents, right? They say that this is effectively a kind of cross-subsidization, right? Because if you can get a whole bunch of families to pay even $55,000 instead of $80,000, you can use that $55,000 over the course of four years, that's $55,000 per year, and you can use that money to subsidize a much lower income student. And hopefully you keep

a desired balance of socioeconomic diversity that way. Got it. So it's sort of a way of maximizing how much you can get from that more affluent family in a way. It's possible that it turns out that way, right? Because if you lose all of these families who could pay $80,000 but don't want to, and if you can find a price point that they are willing to pay, and maybe that's $62,000 or maybe it's $48,000, then you've got a whole bunch of people coming and paying something, and maybe that's profitable for you, right? Maybe it only costs $34,000 to educate an average student, right? So it's profit for you, and you can use that profit any way you want, including to subsidize lower-income students if you choose to. But all of this is making me

wonder, Ron, why don't the schools just lower the sticker price? Like, why do all of these complicated maneuvers with discounts? So there are two main reasons. The first is that there are still people, families, who are willing to pay that sticker price. With that first bucket of schools, the Yales and other selective institutions, maybe it's 50% of the people who are going to come. And with places like Connecticut College and, you know, the hundreds of other schools like it, maybe it's only 5% or 10%, or maybe it's 20%. But you sort of take what you can get if you are that school, because it's real money, right? $50,000 or $75,000 over the course of four years, that can pay for a professor and then some. Right.

And the second reason is that people associate price with quality. If you're Connecticut College, you want to be seen as a 70-something thousand dollar institution, not a 50-something thousand dollar institution. So there's the story that people in higher education talk about. They refer to the Chivas-Riegel effect. And yes, we're talking about the brown liquor here. And the story that gets told, and it's not at all clear whether it's true, is that, you know, once upon a time, Chivas doubled the price and saw their sales go up, not down, over time. Like they pushed more units of that liquor. And what that means is that, you know,

when people see a high price tag, they often think that they're getting something really good. And so this has actually played out in higher education in the past. We saw it about a generation ago with Rice University. So Rice is a very rich institution. They've got a large endowment, and they used to use that to keep their list price low. But they were worried, and it turned out rightfully so, that people were kind of passing them by because they didn't think it was good enough because the price was so low.

And so they jacked up the price over time, and it did not hurt them at all in terms of attracting quality applicants. Actually, quite the opposite. Interesting. So, Ron, we've been talking a lot about private schools, right? What about public universities? What's going on there? Well, they're a big part of the marketplace, and so that's the third category I wanted

to talk about. So their list price, for example, at UConn, the University of Connecticut, it's about $33,000, including everything. So that's a lot lower than the list price at most private colleges and universities. So UConn has that as a kind of advantage to help draw in students. But that's still not affordable for all sorts of people. So even with the financial aid that the state can afford to offer, there's often still a pretty big gap between what the school is asking families to pay and what the students can afford. And so to fill that gap, they take out loans. Okay, loans. So that's the thing that back in the beginning of our conversation, I was telling you

about, Ron, we were just kind of trying to understand where did all this debt come from? So, okay, here's the beginning of the answer. where did all this debt come from? So, okay, here's the beginning of the answer. Right. And here's the thing. Loans are just a part of this super complicated ecosystem. And so, if you wave the loans away or part of the loan balances, it doesn't change the fundamentals of what's going on here, which is that you've got these list prices that seem completely absurd and insane. And aid is increasing to help close the affordability gap. But then families still have to pay a whole lot of money for these degrees. And many people are continuing to borrow in order to make the numbers work. So these public universities, to make the numbers work.

So these public universities, these are important places, right? I mean, like you said earlier, they used to be places where a middle-class American could go work their way through school, say, you know, through a summer job, after-school job. And it sounds like they're not that anymore. Instead, that same student is taking on a lot of debt. That's right. So that typical middle class, middle of the road American family has an income of,

you know, roughly $70,000 a year. Well, that family is actually paying something like $20,000 to send their kid to UConn. So that's a really high percentage of somebody's income to be asking for. And it's definitely more than schools had been asking in the past. So Ron, big picture here. The system you laid out, you know, is pretty complicated. The system you laid out, you know, is pretty complicated. But at the most basic level, for your typical American family, you know, middle of the income ladder, this 70,000 a year family we were talking about, how would you describe how they've fared in all these changes? I mean, what have these changes meant for them? Nothing good. for them. Nothing good. Sabrina, when we think about this system, we know that families with reasonably high incomes are navigating it okay, right? They've got time, they've got resources,

they can figure out how to pit one school's offer against another school's offer and maybe get a little more money in the process to make a deal. But then you've got everybody else. These are the middle-income people, the lower-income families. These sticker prices and also just the sheer ferocious complexity of our system is discouraging people from applying at all. Maybe they don't even try to go to college or they go to college, but they don't get such a great deal. They pay too much for an education that maybe isn't so good and doesn't pay off or worse, they drop out. And then they've got that student loan debt, but there's no degree that comes with it. And therefore, there are no benefits that come with a degree. And that's a devastating effect, right? Higher education is this key driver of upward mobility and a person's lifelong earnings.

And there are just too many people who think now that the college gates have closed on them. Ron, thank you. Thank you for having me. We'll be right back. Here's what else you should know today. On Tuesday, a government report showed that inflation remained stubbornly high in August. Bad news for the Biden administration, which had been hoping to rein it in. Prices rose 8.3 percent from a year earlier, slower than in July, but still faster than economists had expected. The report sent the stock market tumbling in its biggest drop

since the depths of the pandemic in 2020. The data appeared to cement the case for another large interest rate hike at the Federal Reserves meeting next week. And Ukraine's military continued its offensive in the country's northeast. Times reporters in areas that Ukraine reclaimed witnessed abandoned Russian military equipment, clothing, and even mail scattered in a way that suggested a frantic retreat. In the newly recaptured village of Verbivka, residents told Times reporters that the Russian troops that had occupied their village had been dropped off by buses and didn't even have their own vehicles.

Ukrainian officials said on Tuesday that, in all, some 300 communities in northeastern Ukraine had been liberated. Today's episode was produced by Jessica Chung and Eric Krupke. It was edited by Lisa Chow and Mark George, contains original music by Dan Powell, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly. That's it for The Daily.

I'm Sabrina Tavernisi. See you tomorrow.