Thursday, August 16, 2012

A Wrinkle on Education Pricing

You probably know this one already, but I just glommed onto a wrinkle in the college pricing game.  

We all know (don't we?) that pricy schools share the wealth: they charge rack rate to the eager and solvent. Then they transfer some of the wealth as "scholarships" top the ones they really want.

Do the numbers.   Suppose the rack rate is $100.  The effective cost is $80.  You have two eager applicants;  #1 is willing and able to pay $100, #2 would love to enroll but he can't scrape together more than $60.  How do you get them both?  Answer, you charge the one $100, and you transfer $20 to the account of the other.

So far, old news. What I just noticed is this: you tell #2, "good news, I am giving you a scholarship...."  A scholarship of what?  Well, you are cutting his price from $100 to $60, so you tell him  "I am giving you a scholarship of $40."  But you're not.  In the strict sense, I suppose you could say you aren't giving him any scholarship at all; you are just making a semi-voluntary wealth transfer from #1.  But set that aside: the point is that in any event, the amount in play is not $40, but only $20.   Generosity on the cheap.

[Afterthought: I suppose it works the same for any transfer pricing scheme, but right now, education may be one place where transfer pricing really thrives.]


Anonymous said...

But in most cases, isn't there an excess of demand for a limited number of seats? Considering opportunity costs, it usually does cost the school another 20k to provide that scholarship.

Ken Houghton said...

You have just explained how I ended up in the Ivy League instead of at a state school.

I'd like to thank Bill Clinton's speechwriter.