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October 25, 2022

Does It Cost More To Attend A Private College?

At first glance, private colleges appear to be radically more expensive than their state university counterparts. For instance, in the 2018-19 school year, the average published price for in-state tuition and fees for an undergraduate degree at a public university was $10,230. For the same year, the average published price for an undergraduate student at a private college was $35,830. That is more than three times as much! (Trends in College Pricing: 2018 (College Board, 2018), p. 9.)

However, in the world of private colleges, there is a big difference between the published tuition and what students will actually pay. Of that $35,830 sticker price, the average student actually only pays $14,600. The difference between the sticker price and what the student pays is primarily covered by “scholarships” granted by the college. Some of these scholarships are funded by gifts or endowments, but many of these scholarships are actually provided by a practice known as “discounting.” Discounting happens when a college provides an unfunded scholarship to a student. You simply knock $20k off the published price of tuition and say that it was a “scholarship.” In the 2017-18 academic year, the average college discounted 52.2% of their freshman tuition through scholarships, which was accomplished, not by gifts or an endowment but rather by a simple reduction of the college’s sticker price.

The practice of discounting gives private colleges several significant advantages. First, it allows private colleges to set their tuition rate ridiculously high. Now you are probably wondering how that is an “advantage”: aren’t high prices an impediment? Why would the average private college publish its tuition at $35k, knowing full well that it will end up knocking $20k off the price? The answer is that a high price signals something very important to the college’s consumer. It signals that this school is extremely prestigious and exclusive. And you know it is exclusive because it costs three times as much as the state university down the street.

Think of discounting this way – when I buy gas for my old Ford pickup, I am simply looking for the cheapest gas possible. But when I buy wine for dinner, my motivations are a little more complicated. Yes, I still don't want to pay much, and while I don’t mind the adjective “cheap” going along with the gas I buy, I’m going to cringe at the thought of buying “cheap” wine. I want my wine to seem expensive while being affordable. This is why I am a sucker for a wine bottle that looks like it has been marked down from a very expensive price. I’m also a sucker for a picture of a chateau on the label. If the bottle has been marked down from $65 to $8 and has a pretty chateau on the label, I’m buying it. This instinct is what private colleges are taking advantage of when they discount heavily. They are able to appear expensive while actually being much more affordable than you’d think. And just as I am not a sophisticated wine connoisseur, most prospective students are fairly ill-informed about the college market when they are making these decisions.

But there is a second advantage to discounting. Colleges don’t simply put an X through their inflated tuition price and scribble the discounted tuition below. They set the discount as a personalized “scholarship.” The recipient of the scholarship believes that the actual price of the school is really $35k and that the scholarship they are receiving is the exception, not the rule. This strengthens the college’s position with the student in two ways. First, the prospective student believes that he has been admitted to an extremely exclusive private college. How does he know that it is exclusive? Because it costs $35k a year! On top of that, he has made such an incredible impression on this very exclusive college that they are willing to give him $20k to attend. He mistakenly believes that there actually is $20,000 in a bank account somewhere that has been directed to cover his expenses. That is not the reality.

Discounting can also be a great way for a college to knock out a competitor. Imagine a student, we’ll call her Heather, who is torn between two colleges. Both colleges have accepted Heather, so now the bargaining begins. College A has a sticker price of $38,000, but they offer Heather a “scholarship,” which is actually a discount of $20k, for a final price of $18,000. College B doesn’t discount and offers Heather the published price of $18,000. So both colleges are coming to Heather with the same tuition total of $18,000. But because of their discounting, the recruiter for College A can tell Heather that College A has already invested $20,000 into her, which she would be walking away from in order to attend a cheaper college that hasn’t put any money into her. According to the recruiter’s logic, she would be losing money if she chose College B. And although this argument is pure deceit, you would not believe how often it works.

The practice of discounting works powerfully on the egos of college applicants and even more powerfully on the egos of their parents. It can be a bit tedious being around parents of high school seniors bragging about the various scholarships that their overachieving students have won from various colleges. But when you know how these scholarships are actually awarded, then it really just gets a little silly. What is interesting is that if you know the typical discount is a little over 50%, then you realize when somebody is telling you that their wonder-child got a $15k scholarship at a school with a $45k annual tuition (far less than the 50% average), there is something else going on. In fact, these people are actually telling you that their child was below average, and so they are not getting the big discount everyone else is. In fact, they are helping to cover the tuition of some of the stronger applicants as well. You should be nice, smile and nod approvingly, and politely keep these facts to yourself.

Another benefit of discounting is that it allows you to capture maximum tuition revenue from the few families that can afford it while still keeping open the door for the middle-class masses. There are always a few families that are paying that full $35k annually, making it possible for the school to offer full rides to select exceptional students. If the college had set their tuition at $15k, they would have missed out on the opportunity to collect that extra money from the wealthier families. Setting the price high and lowering it, through discounted scholarships, on a case-by-case basis allows them to keep the price high when they hit a family whose finances can handle it.

I should note that I don’t believe all discounting is inherently evil. To take an example from the private, Christian, K-12 school that my own kids attended—as a point of principle, they work hard to not turn families away because of finances. If you can’t afford the full tuition (which is astonishingly affordable), then they figure out a price that works for you. To me, this is what Christian charity ought to look like—laboring to keep the door of opportunity open to your neighbor. So, I think that there can be a legitimate place for a college to simply discount someone’s tuition as a way of helping a deserving student afford an education that he otherwise could not have paid for. But the question is, with our discounting strategies, are we seeking to help the poorer students, or are we seeking to fleece the wealthy? The current strategy of discounting is tilted towards the latter.

And so, we now know that in actuality, despite the shockingly high sticker price on private colleges, the actual average tuition price for a private college in 2018 was about $17,200. It cost a good bit more than the state university, on average about $10,230, but it was not as different as many assume. In fact, you should note that when you look behind the curtain, you realize that though private colleges often look quite expensive (because they want you to think that they are), they actually are educating college students for only a little bit more money than the large state universities require. Remember that the average state contribution per student at the state universities in 2018 was $7,853, and the average tuition payment from the student that same year was $6,788, for a total of $14,641 of revenue per student at a state university. And the average tuition payment at a private college for that same year was about $17,200. You have to remove the illusion that discounting creates, and you have to also take into account the state appropriation to the public universities. And when you look at the actual cost per student, private schools are only slightly more expensive.

While public universities are subsidized by their respective state governments, private colleges are more subsidized by the federal government. This is because the percentage of private college students receiving federal financial aid is actually higher than the percentage of students receiving aid at public institutions. Students at a private 4-year college will receive, on average, $12,300 in federal aid. Students at a public 4-year college will receive, on average, $9,600 in federal aid (Table A-4.) This also means that the federal government is the main contributor to private colleges’ revenue. It would be easier for private colleges to eliminate tuition checks from mom and dad than it would be for these colleges to eliminate the federal money that supports their students.

This means that our higher education system is dominated by government money. We are not relying on “college savings” from frugal parents and hard-working kids with summer jobs. We primarily rely on the federal government to fund our college education. Following that, we look to the states. And then, at the very end, we look to individual students and their families. The distinction between “public” and “private” universities is not as strong as many think, given that both rely heavily on government money. As we continue in this series, we hope to make clear how relying on government funding has had deleterious effects on America’s colleges and universities.