We often hear the claim that college tuition is soaring because of rising demand. In simple language, colleges push tuition upward simply because they can. In this view, colleges and universities are like little monopolies that charge just what the market will bear. But does this idea hold up to close scrutiny?
If schools use their market power to exploit students, then surely the elite universities could extract more revenue per student than the schools that are merely good. Here’s the data.
On the vertical axis you can read off the average net tuition for each school in the US News & World Report top fifty private universities. Net tuition is the actual revenue per student that the school collects from its students after the school offers all of its internally generated discounts and scholarships. On the horizontal axis we measure selectivity. The most elite schools are the ones that have the largest number of applicants per offer of admission.
Despite having sticker prices (i.e. published tuition) in the 40K to 50K range, most of the private universities in the sample actually charge an average of less than $25,000 in net tuition and fees. There is absolutely no evidence that the more elite schools use their elite status to charge more. In fact, schools with 9-12 applicants per admission slot, and this is the real elite, charge several thousand dollars less than schools that are much less selective. Excess demand does not lead schools to jack up the price.
The truth about college tuition-setting is that schools are deeply concerned with the quality and the composition of the student body, not just the revenue potential of the group. Harvard and Princeton likely could charge full freight to every student without suffering a single lost SAT point from the profile of their average student. But the student body would become much less diverse in so many ways. All selective schools leave lots of money on the table uncollected.