Harvard made headlines a week and a half ago when it announced a sweeping reform of its financial aid disbursements, increasing assistance to middle class families which had previously been largely ignored by such elite institutions. The reform included a measure ensuring that all families earning less than $180,000/year would pay no more than 10% of their annual income, a transition from loans to grants, and the elimination of home equity as a factor in determining the aid a student will receive.
The announcement has been a PR boon for Harvard, which has received praise from the New York Times, Washington Post, and Mother Jones. Meanwhile, the Wall Street Journal saw through the hype:
Drew Gilpin Faust, the school’s new president, said the policy is designed to help families facing “increasing pressures as middle-class lives have become more stressed.” Before applauding Harvard’s altruism too loudly, however, readers should know that the school also had its back against a wall. In September, Republican Senator Chuck Grassley held hearings on whether colleges should be forced to spend a higher percentage of their endowments each year.
This fact was clear enough, however, and even admitted by Ms. Faust (a hilariously appropriate name for a Harvard president, but I digress). As the article continues, the real problem is the existence of government handouts for education. By constantly increasing tuition aid to college students (in what amounts to a corporate welfare racket on par with monthly kickback checks to Halliburton), students are no longer incurring the costs of college, and so there is no check on university’s tuition hikes:
Ironically, these government handouts are creating the tuition problem. Tuition has risen about three percentage points faster than inflation every year for the past quarter-century. At the same time, the feds have put more and more money behind student loans and other financial aid. The government is slowly becoming a third-party tuition payer, with all the price distortions one would expect. Every time tuition rises, the government makes up the difference; colleges thus cheerfully raise tuition (and budgets), knowing the government will step in.
A well-stated argument, overall; the article merits a full read. But I ‘d like to posit another, less feel-good explanation for Harvard’s “generous” restructuring of its financial aid. As anyone that’s applied to college, had a relative applying, or even driven by a university campus in the past 10 to 15 years knows, the role of rankings such as US News & World Report’s is unavoidable. And just like high schoolers pad their resumes to look good for all the elite schools, the elite schools send all the right signals back.
First, Harvard has steadily risen tuition, a trend observed in schools of all qualities. On the one hand, this is due to a higher and higher volume of applications being received. But also, raising tuition sends a signal of higher quality to parents and students who have no comprehensive understanding of a school’s teaching and research credentials. These increased revenues are then essentially rebated to students in the form of increased financial aid, resulting in little net change in cost, but sending a positive message to prospectives: “This school is on the rise, and we want you to be a part of it.” As the NY Times reported last December:
The recognition that families associate price with quality, and that a tuition rise, accompanied by discounts, can lure more applicants and revenue, has helped produce an economy in academe something like that in the health care system, with prices rising faster than inflation but with many consumers paying less than full price.
Average tuition at private, nonprofit four-year colleges — the price leaders — rose 81 percent from 1993 to 2004 , more than double the inflation rate, according to the College Board, while campus-based financial aid rose 135 percent.
Meanwhile, increasing aid means increasing your applicant pool without increasing the class’s seats. The result: greater selectivity, one of the biggest factors in determining those omnipresent college rankings. The more applicants a university turns away, the higher it moves in the rankings, and in the fiercely competitive world of elite academia, this could be well worth the tens of millions of dollars invested.
So in short, the government’s tuition aid programs artificially inflate the price of college. This is exacerbated by a marketing theory that encourages universities to increase tuition while increasing aid at least as much, enhancing the perceived prestige of the school while simultaneously allowing students to feel more privileged and wanted when offered what seems to be a generous break on tuition. Meanwhile, the increased number of applicants this process creates results in more rejections, raising universities in the rankings.
Then again, maybe Harvard is just really super-nice.