Why the Government Won't Let Colleges Reduce Tuition

By Ike Brannon

Congress should give permission for private colleges to cooperate in cutting their tuition. It’s hard to see who would be hurt in the process.

Most people think that college tuition is too high, and many presidents of private colleges agree with that sentiment and would like to cut their tuition. However, they cannot legally do so, at least not in a way that would be beneficial for them — which would be for a large group of private colleges to jointly reduce tuition.
By law, such a move would constitute price fixing, even though a conspiracy to reduce prices would be a boon for customers.
When the law forces a nonsensical result onto society, it’s time to change the law. Congress should give permission for private colleges to cooperate in cutting their tuition, which would lower college costs for many students and result in more people attending college. It’s hard to see who would be hurt in the process.



The high cost of college

Many aspiring college students are unaware how few people actually pay the full tuition price that the media loves to gnash its teeth over.

Most colleges come close to being what economists call perfect price discriminators: The price they charge their customers — the students — depends on how much money students have. Nowhere else does a customer have to disgorge his W-2s to find out how much he'll have to pay for a good or service. Few people pay the full posted tuition at most private colleges: In my unscientific survey of administrators at a half-dozen schools I found that roughly 1 percent of their students paid full freight.
While high tuition gives schools the ability to extract a few thousand dollars more from a handful of wealthy families, the downside is that many other students find the advertised tuition too daunting to even consider applying to private schools. Many aspiring college students are unaware how few people actually pay the full tuition price that the media loves to gnash its teeth over. Instead, they limit their search to state universities or junior colleges.
That’s not only a bad deal for private colleges — most of whom need all the quality students they can find — but also for students who might profit from the smaller classes and more personal attention that private schools typically provide. It isn’t necessarily the case that a private education costs prohibitively more than the local public college: Middle-class families typically get enough financial aid to put the actual cost of a private college within spitting distance of tuition at state university.
Getting permission from the government to cut tuition
The answer to the private college tuition conundrum seems simple at first blush: why don’t private colleges simply reduce tuition and reap the benefits? Indeed, a few colleges have done precisely that, and have been rewarded with a sharp spike in applicants the first year or two afterwards.
However, the gains from such a tuition reduction are short-lived: the typical pattern from a unilateral price cut is that by the third year the market has forgotten the gauzy rhetoric behind the price reduction and perceives the cut-rate tuition as an indicator of an inferior good, and applications decline. The combination of a lower tuition with fewer bodies in the classroom can put a school’s very survival in doubt.

College presidents don't like being told by an officer of the government that they're risking jail time, and any nascent discussions quickly ceased.

Private colleges can cut tuition and avoid such a death spiral, but only if they do so in concert. However, the specter of a few dozen private colleges organizing to reduce prices — which might seem like an unmitigated good to parents — risks the ire of the Justice Department, which launched an investigation when a college president suggested such an idea at a public conference. College presidents don't like being told by an officer of the government that they're risking jail time, and any nascent discussions quickly ceased.
For such an effort to resume in the current environment it will require Congress to give permission for schools to jointly reduce prices. Such negotiations can take place under the auspices of the Justice Department, if necessary.
Price-fixing laws exist for a very good reason — to keep entities from banding together to raise prices. Using these laws to stop colleges from banding together to lower tuition is banal public policy.
Ike Brannon is a senior fellow at the George W. Bush Institute and president of Capital Policy Analytics, a consulting firm in Washington, D.C.