Editor’s note:
This piece is part four of a four part series. You can read the rest of the collection here.
So far, this series has examined the college pricing system that leads institutions to provide financial aid to students without financial need. Parts 1 and 2 documented the facts. Colleges offer this aid because enrolling higher-income students generates revenue that colleges need to cover their costs. The extent of this practice varies by sector, but in some parts of the market it is both widespread and growing.
Part 3 explored the incentives that shape these pricing strategies—why they persist, why they may expand, and what consequences they carry. One clear casualty is price transparency. The system may also limit access for lower- and middle-income students.
This final installment considers the implications for public policy. Any policy response must balance the financial realities institutions face with the goal of promoting affordability and access. These challenges fall into two broad areas: improving the transparency of the prices for students and reconsidering how competition operates among institutions. Both are shaped by the underlying financial pressures colleges face.
Increasing price transparency would help
When college prices are obscured by opaque discounts, students and families are left to guess what they will actually pay. The sticker price is the most visible, but it is inaccurate for most students. For lower- and middle-income families, that can discourage applications to institutions they might in fact be able to afford. Research shows that concerns about affordability are widespread, even in the presence of net prices that are lower than expected.
Greater transparency would help correct these misperceptions. There is broad agreement on this point. The College Cost Transparency Initiative (CCTI), for example, has led hundreds of institutions to adopt clearer financial aid award letters. These improvements are meaningful, but they arrive late in the cycle—after students have already applied and been admitted. Transparency earlier in the decision process would be more valuable.
Federal legislation has also been discussed and proposed to standardize and simplify how financial aid information is presented, though no bills have been enacted lately. The details of these proposals vary, but the goal is clear. If institutions are unable to make sufficient progress on their own, federal intervention may be warranted.
Improving transparency would help students and families make better-informed decisions. It would not, however, address the underlying financial pressures that lead colleges to adopt these pricing strategies in the first place.
Reducing operating costs would help, but that is hard to do
An important component of the pricing problem is the ever-increasing cost of running a college. That is what pushes colleges to increase revenue and leads to these pricing strategies involving offers of financial aid for students with no financial need. If colleges could control rising costs, there would be little need for a public policy response to the increased use of price discounting for students without financial need other than to address the transparency concerns.
But the nature of higher education makes cost control difficult. Higher education is fundamentally a service-sector industry, heavily reliant on skilled labor (faculty, advisors, and student support staff). Increasing the productivity of these workers without compromising quality is difficult. A professor still teaches a limited number of students, much as decades ago, even as wages across the broader economy rise with productivity in other sectors. To compete for workers, institutions must also increase wages even though output per worker isn’t rising much if at all. This dynamic, known as Baumol’s cost disease, creates persistent upward pressure on costs that is largely outside of colleges’ control.
At the same time, demand-side pressures also contribute to rising costs. Besides price, colleges compete for students by expanding services, amenities, and overall campus experiences. This includes investments in residential facilities, dining options, recreational centers, mental health services, and career support infrastructure. These pressures interact with the need to enroll higher-income students, who can afford to pay more and may respond favorably to such spending.
To be sure, colleges can and should make efforts to control costs and increase productivity, but these trends are longstanding and difficult to offset through internal reforms alone. They raise a central policy question: How can public policy address the structural financial pressures that shape the pricing strategies described in this series?
Provide sufficient public funding for higher education
Financial pressures are particularly clear at public institutions, where state funding is an important source of funding. Public colleges and universities often face a basic constraint. State policymakers are typically in charge of setting tuition, and keeping tuition low for state residents is a political priority. This can contribute to a budget gap. Institutions must find ways to fill it.
Increased state appropriations are one option to fill the gap, but they are often insufficient. Another is to enroll higher-income, out-of-state students who pay higher tuition. This strategy generates revenue, but it can conflict with the goal of prioritizing access for state residents.
Efforts to attract out-of-state students can also intensify competition and contribute to the use of financial aid for students without financial need, as discussed in Part 3. In turn, this may reduce the resources available for need-based aid. If maintaining low sticker prices is a priority, then adequate public funding is necessary to reduce reliance on these strategies.
These pressures may intensify in the coming years. Federal policy changes that reduce support for programs such as health care and food assistance could place additional strain on state budgets. If so, funding for public higher education may come under further pressure, reinforcing institutions’ reliance on tuition revenue and competition for higher-income students.
There may be value in institutional coordination
In most markets, competition is a powerful tool for keeping prices low. When firms engage in anti-competitive behavior, governments intervene through antitrust enforcement to protect consumers. In general, this approach serves an important purpose.
Higher education, though, is not a typical market. The price competition that colleges engage in often focuses on attracting students who can pay more. Under these conditions, competition can produce undesirable results.
The U.S. Department of Justice has long sought to prevent collusion among colleges in setting prices. A prominent example is its 1991 action against the Ivy Overlap Group, whose members coordinated financial aid offers based on shared assessments of applicants’ ability to pay. Preventing such coordination is a standard application of antitrust policy.
Yet not all interventions produce the anticipated effects. In 2019, the National Association of College Admissions Counselors (NACAC) reached a settlement with the Department of Justice that led to the removal of provisions discouraging colleges from recruiting students who had already committed elsewhere (called “poaching”). Following that change, some institutions began actively pursuing those previously committed students, often with additional financial incentives. While some students benefited, the change intensified competition for higher-income students and may have expanded use of aid without financial need.
Pricing at private institutions with small endowments is one example where a collective agreement would help. Many of these colleges offer aid to most students without financial need. In principle, they could agree to reduce the sticker price and reduce the merit aid, improving the transparency of their pricing with limited substantive impact on the prices that students actually pay. Acting individually, however, each institution has an incentive to maintain the current approach, as described in Part 3. Still, antitrust policy would likely challenge any such coordination.
Then there is the broader question: Should colleges agree to reduce the discounts they offer to higher-income students? Doing so would increase what those students pay but could create room to expand need-based aid, potentially reducing prices for those with fewer resources. This would involve clear tradeoffs, and disagreement about whether such a shift would be desirable is reasonable. But any explicit agreement along these lines would almost certainly draw scrutiny from the Department of Justice, even if it might advance equity goals relative to current practice.
In general, competition is beneficial. But higher education may be a case where increased competition does not always produce outcomes that align with broader policy goals.
Addressing the underlying constraint: External funding for higher education
The preceding discussion has focused on ways to improve outcomes within the current system, but these approaches largely address the symptoms of a deeper issue. The underlying constraint is that colleges must cover their costs, which are rising.
A system that relies heavily on student revenue faces inherent limits in its ability to provide affordable pricing for all students. Suppose higher-income students paid an amount commensurate with average core educational expenses, as reported in Part 1—roughly $40,000 at public flagship/R1 institutions and private, tuition-dependent institutions. If lower-income students paid less than that, revenue from students alone would not balance the budget. Additional resources would need to come from elsewhere.
Some institutions are able to bridge this gap. Colleges with very large endowments supplement student revenue with investment income. Although their sticker prices are often the highest, those prices still fall short of covering per-student spending. At the same time, lower-income students at these institutions frequently pay the lowest net prices because these colleges can draw on external funding, mostly returns on their endowments, to make up the difference.
Public institutions could operate in a similar way if they received adequate state support. When that support is limited, institutions must rely more heavily on student revenue. This reinforces the incentives described throughout this series—particularly the need to attract higher-income students and the resulting use of financial aid for students without financial need.
When external funding is constrained, these pricing strategies become difficult to avoid. Greater transparency can help families understand the system, but it does not change the underlying incentives. Similarly, changes in competitive dynamics may alter behavior at the margin, but they do not eliminate the need to generate revenue to cover costs.
Increasing revenue from other sources is not easy. Large endowments are built over decades and cannot be quickly replicated (although fundraising efforts to move in that direction are warranted). Additional public support is the most direct and scalable way to reduce colleges’ reliance on revenue from students. Recognizing this constraint helps clarify both the limits of current policy approaches and the trade-offs involved in potential reforms.
Final thoughts
One lesson that emerges from this series is that, in higher education, competition does not always produce outcomes that align with public policy goals. Two related policy challenges result from the competition for higher-income students. The first is reduced price transparency, which makes it difficult for families to understand what college will actually cost. The second is that competition, while often beneficial, can in this context reduce the total revenue that higher-income students contribute to funding higher education. This may work against broader access goals by reducing the number of low-income students colleges can collectively afford to enroll or increasing how much they ask low-income students to pay. The result is a system that can be difficult for families to navigate and that may not consistently align institutional incentives with public goals related to affordability and access.
These outcomes result from the incentives and constraints colleges face. Fundamental change would require addressing the financial constraint itself—most directly through increased external support, whether from public funding or other sources. Absent such changes, the patterns described in this series are likely to persist. The central policy challenge, then, is not simply to improve how the current system operates but to determine whether its underlying structure can be better aligned with public goals for affordability and access.
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