decoding the college tuition sticker price

(Washington, DC) Tuition at Stanford is $41,000/year. But Keith Humphries notes that Stanford offers substantial financial aid, so that families that earn $100,000 per year pay no tuition. After mentioning that Stanford’s endowment is $17 billion, he says, “There are many ways for a wealthy university to allocate its resources … I am proud to say [Stanford] has chosen to spend heavily on ensuring that anyone who is admitted can afford to attend.”

I don’t think the implication is correct. It sounds as if undergraduate education costs Stanford $41,000/student, but it deploys its endowment income to defray those costs for middle-class applicants. But the price tag is the same at many private institutions that have far smaller endowments, that seem to have similar costs per student, and that also provide quite a bit of financial aid. Their aid packages for a family with 6-figure income may not match Stanford’s, but they often come close.

I’m pretty sure this is what is going on: There are thousands of families in the top 10% of the income distribution whose kids are highly qualified for college and who want to get into name-brand institutions. It is easy for those families to spend $41,000/year on tuition; their concern is whether their children will be admitted. To charge them anything less than $41,000 is just leaving money on the table–money that can be used for a variety of worthy educational purposes, including scholarships. But if you charge everyone $41,000, you will end up with a much more homogeneous and less talented student body than you want. So you plan to discount in pursuit of both excellence and diversity. As long as the real cost of education is well under $41,000, you can discount tuition for many students without using any endowment income. In fact, I figure that the real cost per student of an excellent college education is more like $15,000. Setting the base price much higher than that generates resources that can be used for good purposes. The problem, however, is that many families see the sticker price and assume that college is not for them.

About Peter

Associate Dean for Research and the Lincoln Filene Professor of Citizenship and Public Affairs at Tufts University's Tisch College of Civic Life. Concerned about civic education, civic engagement, and democratic reform in the United States and elsewhere.
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