Price of College Studies Is Quite Reasonable
It is a commonly accepted idea that, in America, college is out of reach because of its price (tuition and fees). Commonly accepted, but false, as shown by The Economist in a recent article: “American Universities Have an Incentive to Seem Extortionate: They Are Much Cheaper than the ‘Crisis of College Affordability’ Suggests,” (July 23, 2023). The main facts are the following.
In the OECD’s country comparison, the price of college in America is exaggerated because it is based on sticker prices, which are typically discounted, as opposed to foreign prices, generally determined by governments and not subject to market competition. In America, the average private advertised college tuition (including fees) is $40,000 per year, but few students, except wealthy ones, actually pay it; prices are discounted by an average of more than 50%. At Princeton, for example, the average price paid is $16,600, compared to a $56,000 price tag. Moreover, the average discounted price has fallen by $2,000 over the past 15 years, even as the published tuition fees have increased.
Add to this that public state universities (in which three-quarters of college students are enrolled) offer college to state residents for an average price of $10,000. And at the bottom of the price range, community colleges are 50% less expensive than public state colleges, and their two-year degrees can then be applied to a regular four-year college program.
We can understand why publishing sticker prices much higher than the price actually charged is often in universities’ interest (it is in their interest “to seem extortionate”): that’s a way to advertise their quality; and they can offer merit scholarships in lieu of discounts, which make the students and their parents proud.
All that makes sense. The average household income (before tax) in America is $70,000 a year. If the price of college corresponded to sticker prices, it might be difficult to understand how some 50% of Americans hold a college degree, putting the country at the 10th rank from the top among 44 OECD members (OECD data). Finally, note that college subsidized prices (through federal student loans and public universities) increase quantity demanded and push up college prices (technically, a substitution effect), but the taxes that pay these subsidies have an opposite effect (an income effect) that partly compensates the impact on prices.