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Vedder: Higher ed’s ‘Robin Hood’ pricing brings vigorous price discrimination

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A recent Richard Vedder column discusses higher education’s “Robin Hood” pricing whereby the costs students pay for tuition, room and board fees reflect a differential reminiscent of the legendary outlaw whose rob-the-rich-give-to-the-poor activities were a precursor for what’s known today as income redistribution. As college costs continue to rise, the value of the product delivered becomes more closely scrutinized. Ahead of a hoped-for “market correction,” awareness of such practices can help students and their families become more savvy education consumers.

Vedder attributes the “vigorous price discrimination” seen today as attributable to college being one of few things less affordable than a half century ago. He then asks two questions: Is this good and is it sustainable?

To the first question, most academics would enthusiastically answer “yes,” but I am far more skeptical. On fairness and egalitarian grounds, there are strong arguments to minimizing financial impediments for low income persons going to college. But is it the job of unelected university trustees and presidents to redistribute income, or does that more appropriately belong to the formal political process? What is the function of progressive taxation and various government in-kind subsidies for food, housing and medicine for the poor? In order to engage in their redistributionist policies, colleges become privy to all sorts of family financial information that, in my judgment, is none of their business. Moreover, there is some evidence they use this information to punish responsible financial behavior, by such pathologies as giving lower tuition discounts to families that save and live modestly as opposed to ones that borrow prodigiously to finance high levels of personal consumption.

Citing The Wall Street Journal analysis of Douglas Belkin, Vedder writes how “Robin Hood finance (robbing the rich to help the poor) grew particularly virulently between the 2004-5 and 2012-13 academic years at a dozen flagship state universities examined, with subsides to lower income students from higher income ones growing an astounding 13.4 percent a year.”

Texas mirrors the trend described in The Journal. In 2003 the 78th Legislature made significant changes regarding college tuition rates. Prior to this session, the legislature had regulatory authority to set tuition and generally called for charging the same rates at public institutions across the state. With this change, deregulation occurred leaving public universities authority over a large portion of the total tuition charged.

In Texas, an undergraduate student’s tuition rate comprises a statutory rate determined by the legislature for both resident and non-resident students as well as an additional designated rate imposed on any graduate or undergraduate, resident or non-resident student, that the institution’s governing board considers necessary for the effective operation of the institution. With no maximum limit, this designated rate varies by institution and based on program, course level and the academic period.

Tuition deregulation became effective Sept. 1, 2003. By spring 2004, universities were increasing designated tuition rates. Along with deregulation, the 2003 bill contained another provision requiring institutions to “set aside” a portion of tuition payments for needs-based financial assistance programs.

Per Section 56.011 of the Texas Education Code:

“The governing board of each institution of higher education shall cause to be set aside not less than 20 percent of any amount of tuition charged to a resident undergraduate student under Section 54.0513 in excess of $46 per semester credit hour.” An amount of 15 percent is similarly assessed to resident students enrolled in a graduate or professional degree programs.

The Stop Texas Set Asides website accurately calls this practice a hidden tax. Per the state, set aside priority is given to “students who meet the coordinating board definition of financial need and whose cost for tuition and required fees is not met through other non-loan financial assistance programs.”

This basically results in students paying large amounts of extra tuition to fund their peers’ college tuition assistance. Students working multiple jobs to pay their own way through school experience inflated tuition rates that subsidize their fellow students. Students facing years if not decades of debt through their own student loans find a portion of their debt finances not their own, but the education of other students via grants, scholarships, work study programs, student loans and student loan repayment assistance.

For context, a University of North Texas fall 2013 student load of 12 hours and a 20 percent set aside rate prompted a set aside amount of nearly $400.

In 2010, the almost two-thirds of college seniors with student loans graduated with a nationwide average debt of $25,250. That year, nearly 60 percent of Texas graduates carried an average student loan debt of $20,919.

By 2012, the nationwide percentage exceeded 70 with the debt load at $29,400. Texas maintained its 60 percent proportion of graduates with debt, but the average debt rose to $21,373.

Nationally, student loan debt hit $1 trillion in 2011. Per an estimate by the Consumer Financial Protection Bureau, outstanding student loans now approach $1.2 trillion.

Meanwhile, in his State of the Union speech, President Barack Obama mentioned the student debt issue noting how the Health Care and Education Reconciliation Act taking effect later this year will offer the opportunity for Americans to cap their monthly student loan payments to 10 percent of their income.

CNBC reports:

Under existing law, borrowers must pay up to 15 percent of their income toward loans. The new initiative allows them to cap payments at 10 percent. For those who make their monthly payments for 20 years and choose this plan, the remaining balances will be forgiven at that point, according to the White House. Military personnel, teachers, nurses and other public service workers who opt for the plan will see their remaining debts forgiven after a decade.

So is any relief ahead for pay-as-you-go college students or other “rich” targeted by Robin Hood tuition pricing?

Vedder thinks so. Soaring costs and stagnant benefits lowering consumer demand for college make new tuition increases less likely. Additionally, enterprising schools are recognizing the competitive opportunities other schools’ price discrimination policies offer.

As tuition rates drop so can the need for other financial assistance. This more brings a free market approach into college and university environments – a move that will greatly benefit all higher education consumers.

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