Asymmetrical Information

I am aware of at least one example of an institution which has been doing just this for a very long time- Cooper Union

http://www.cooper.edu/administration/about/Welcome.html

Isn't part of the prestige in attending an elite school its cost? And aren't schools setting up their future donations by admitting students already coming from wealthy backgrounds? I can't say I have a lot of experience with elite schools at any level (I was at Penn's bookstore once), but they seem to be offering status as well as education.

it's a great bookstore.

You ain't kiddin.

Pertinent to this is Philip Greenspun's essay Tuition Free MIT, which asks: "What would the Massachusetts Institute of Technology look like if we did not charge undergraduates tuition?"

Regis High (NYC) has been doing it since 1914...

http://en.wikipedia.org/wiki/Regis_High_School_%28New_York_City%29

Your headmaster explains it. If they didn't charge tuition, they could not decide who pays and who doesn't. To use Yale as an example, because "Yale operating budget" produces some quick hits, net student fees are only 12% of Yale's operating budget, and grants and scholarshops are over a third of gross student fees. The endowment spending target is 5.25%, but it never comes close to this, and the difference could cover net student fees entirely. But super-inflationary rises in tuition, combined with super-inflationary rises in financial aid, allow them increasing discretion to decide exactly how much each student pays.

There is an advantage in signalling - paying for something does demonstrate that you value it. Using "needs-based" aid allows the school to price discriminate, effectively scaling the signal required to means.

There may be some advantage from cognitive disssonance - if you paid for something, you're more likely to value it more highly.

Having students and/or their families take on debt may incent the students to go on to be more economically productive, which may increase net social benefit.

I think Aaron has it right. At my college, before I finished undergrad, I remember the student government discovering - and the student paper lamenting - that the administration had chosen to raise tuition as part of what they called "Prestige Pricing". That is to say, the current tuition rates easily allowed for them to balance their budget, but they felt that a higher tuition rate would increase the perception of the school's value to prospective students.

They're not entirely wrong. It's a common phenomenon in many fields, people assume the more expensive stereo equipment or car or clothes are better. But it makes me sad whenever I check my student loan balance.

Also, I am not actually in favor of zero tuitition. It is a valuable product and people should have to pay for it, and do you want more liberal arts majors? I think the best thing for these schools with massive endowments would be to turn all the byzantine discretionary grants into an across-the-board reduction, then tap the endowment enough to reduce the bill to $18,000 or less per student, and let them get Stafford loans.

Yes, the essay in the update has it right, except that my point is that they don't charge people based on what they can afford to pay, but what they think they should pay. I find this much more troubling.

What would be the rammifications if Universities charged full price but credit back 75% of your tuition when you graduated if you reached a certain GPA?

What would be the rammifications if Universities charged full price but credit back 75% of your tuition when you graduated if you reached a certain GPA?

That GPA would instantly become the minimum awarded.

The more-basic question is why universities, unlike governments and corporations, have endowments. A visitor from Mars would probably report back that universities are organizations that maintain huge investment portfolios and then spend some (maybe half or less) of the earnings of those portfolios on athletics and education.

"The more-basic question is why universities, unlike governments and corporations, have endowments."

Are you sure that neither governments nor companies have endowments? Insurance companies tend to have very large investment funds which they use to pay larger than expected claims, and the government basically claims to own the whole country and spends 30%-40% (depending where you live) of its earnings. Sure these things are not called endowments, but are they really so different in the function they play?

It is probably not true that in a zero tuition establishment: "people who could afford it wouldn't pay." When my kids were in a private school (until the $ ran out), in addition to the ever-escalating tuition, there was an annual fund drive. Contributors earned "insider points" and were paying at tax advantaged rates. I don't see why this would abate. Also, alumni contributions are precisely payment by those who can afford it, albeit some years after receipt of the certificate.

But if it were inexpensive they'd have to do something horrible like select students on academic merit. Then how would the undeserving offspring of alumni, like our President, be able to buy their way in?

The private school I went to ('73: I'm getting old) recently sent out a brochure touting the new football field at the high school. The field will include artificial turf and lights, at a cost of $1.95 million. This is for a coed day school with 450 students in the high school, in northern Ohio. I doubt they will be able to play more than 6 games a year on the field. Assuming the field lasts 25 years ( the guarantee for the lights), and opportunity cost of 5%, it will cost $23,000 per game for the field. That would cover tuition & fees for one student per game.

I don't think they want my money any more. I had thought they used it for education.

The more-basic question is why universities, unlike governments and corporations, have endowments.

Why not? I still don't get why people (including Instapundit this morning) are bothered by the idea. It's a basic tenant of wise financial planning that you do NOT spend everything you receive now, and invest it in order to provide stable, long-term sources of income.

Somebody commented: "Why not? I still don't get why people (including Instapundit this morning) are bothered by the idea. It's a basic [tenet] of wise financial planning that you do NOT spend everything you receive now, and invest it in order to provide stable, long-term sources of income."

Individuals save a lot so they can retire someday, or perhaps so that they can pass on wealth to their kids (not necessarily a great idea, unless the kids have special needs). Universities, though, don't retire and don't have heirs, yet they try very hard to increase the size of their endowments. If an ordinary corporation did that, it would face a punitive tax (the accumulated earnings tax). I can see the point of an endowment large enough to tide an institution over a few rough years. An endowment of a million dollars a student (Princeton's, for instance) could keep a university running forever, without tuition, yet the trustees keep trying to build it up more.

I once represented a charity that had been started in the mid-19th century to help a hospital, Over the years, it had accumulated millions. Every now and then it would spend a few hundred bucks on the hospital, but mostly it just watched its money grow, and the trustees congratulated themselves on their success. Something about being a trustee of a rich charity seems to cause people to want to accumulate money that mostly won't be used for anything except accumulating more money.

Alan,

I thought by your tone that you were maybe shooting for a refutation, but I'm not seeing it. What did I miss?

Most universities out there are growth institutions. If the endowment doesn't grow, neither does the university, unless it locates alternate sources of funding. It's also worth noting that research universities generally face increasing costs for research, particularly in science and technology. As the progress of science and technology marches ever upward, so does the cost of the equipment needed to conduct research.

Equally important, though, is the fact that many institutions are publicly funded. Money that wasn't coming from an endowment would be coming out of your pocket, instead. Is that preferable?

And third, my question stands: what IS the big deal with the instituion holding an endowment? It's an investment property; the money doesn't just vanish out of society Uncle Scrooge style, to be forever hoarded under a giant mattress. Moreover, AFAIK an endowment is normally comprised of voluntary contributions, which makes it much less my or your business than it otherwise might be.

Cooper Union owns the land under the Chrysler Building, not the Empire State Building.

Joe EE'99

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