Students Gaining Bargaining Power with Colleges

Graphic credit: Wall Street Journal

by James A. Bacon

In  a properly functioning marketplace, consumers exert power through their ability to comparison shop and bargain with sellers. One of the main limits to this consumer power is something economists call “information asymmetry.” Information asymmetry occurs when sellers of a good or service possess more information than buyers, and it typically allows them to charge more.

Information asymmetry is likely a contributor to the runaway cost in the cost of college attendance over the past few decades. A major factor in any consumer’s decision is price; in the case of higher education, price refers to charges for tuition, fees, room, and board. Higher-ed institutions traditionally knew a lot more about a student’s finances than students knew about the institutions’. Enjoying a tremendous advantage through this information asymmetry, higher-ed institutions have been able to charge higher prices than they would have otherwise. But the asymmetry is eroding.

A recent article in the Wall Street Journal describes how families are bargaining over college costs — and winning. After decades of runaway tuition increases, families are pushing back. Students are applying to more schools in the hope of having more options, and in the COVID-19-driven recession, in which enrollment is expected to decline, they are emboldened to press for bigger breaks on tuition. Desperate to fill dormitories as classrooms, many higher-ed institutions are yielding.

We won’t know how these trends are playing out here in Virginia until the State Council of Higher Education for Virginia compiles this fall’s enrollment numbers. But some combination of enrollment declines and price discounting seem inevitable at most institutions.

The Journal article does not discuss information asymmetry per se, but it sheds light on how colleges and universities have enjoyed significant information advantages in the bargaining process in the past, but now are losing their edge.

The first thing to understand is that posted tuition numbers are increasingly meaningless. A college posts high sticker prices in order to offer discounts or financial aid to applicants, depending on how price sensitive students are and how badly the colleges want them. Colleges offer bigger discounts to students considered more desirable, either because they are high academic achievers, fit favored demographic profiles, or have other desired characteristics.

Indeed, according to Journal, an industry has grown up around the admissions process to help colleges and universities maximize revenue yield.

The industry of enrollment-management consultants has helped colleges emulate for-profit companies. One consultant told attendees at an admissions-officers conference last year to be more like Starbucks and Amazon, improving customers’ experiences and maximizing net revenue and “yield,” the percentage of accepted students who enroll.

To tailor discounts, colleges tap personal data much as companies do, said David Hawkins, an executive director at the [National Association for College Admission Counseling].  “Colleges are picking up the same information that Coca-Cola or, you name it, Forever 21, all of those entities are picking up.”

A treasure trove of financial data comes from the Free Application for Federal Student Aid, or Fafsa, a form that is submitted to apply for federal aid, as well as apps, websites, ad information that prospects provide. Access to Fafsa provides institutions detailed financial information about students that they might not otherwise obtain. Students have few offsetting information sources regarding a college’s cost structure, enrollment objectives, and willingness to cut tuition or provide financial aid. Thus, students are at a significant disadvantage in the negotiating process.

But the balance of bargaining power is shifting. The American Council of Education, a university trade group, expects college enrollment to drop as much as 15% nationwide this fall. Others think enrollment could rise, but only because higher-ed institutions will engage in pervasive discounting. In the past, colleges were barred from recruiting beyond May 1 students who have paid deposits at other  schools. Under a consent decree with the Justice Department, however, that restriction is lifted. In the Journal’s words, “Schools can dangle bigger discounts in front of a student who has accepted a rival’s offer.” That will give students more power to play one institution off against the other.

Another sign of shifting bargaining power is that students are applying to more colleges than in the past. Applying to more colleges increases the odds of being accepted at multiple institutions, and acceptance at multiple institutions gives families an opportunity to seek the best financial package.

The cost of attendance has gotten so high that it now pays families — especially well-to-do families likely to get socked with the biggest tuition payments — to hire their own consultants. The Journal cites the example of Todd Fothergill in Austin, Texas, who gathers data such as the net tuition schools charge families in different income groups, then plugs it into software to reveal which schools a particular student will have the most leverage over. Universities, he says, are using discounts more strategically: raising tuition and then offering more-desirable applicants bigger discounts.

Students’ increased price sensitivity and bargaining power will put unaccustomed pressure on public colleges and universities to go off the published rates. Count on Bacon’s Rebellion to track how these trends play out in Virginia.

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9 responses to “Students Gaining Bargaining Power with Colleges

  1. I thinking Higher Ed is thinking longer term – so treading water right now but expecting at some point for all this stuff to subside enough to get back to regular order – and by that time – the “demand” will be out the wazoo and they’ll get their due.

    You never had to spend 4 years on a campus to get a good, marketable, education to start with. It’s always been a discretionary product – with a strong, strong demand and this is a speed bump not a wall.

  2. Larry,
    I will invoke two of my favorite phrases once heard across the bargaining table: “You have failed to miss the point” and “The penguin may be starting to swing the other way.

    You are counting on a kind of static analysis of things, i.e., you think that demand will be the same for higher ed as it was before the pandemic. That seems the point of Jim’s post, which you dismiss saying “All this stuff” will subside and we’ll get back to regular order. In keeping with things heard across the bargaining table, I will mix several metaphors, “That horse is out of the barn”

    Jim didn’t mention the part about colleges using yield algorithms the way the airlines do. Now, college consultants apparently use their own algorithms to counter what the colleges do. Zoom and online learning have arrived; they will not go away. It will change the economic landscape for colleges.

    This was all predictable. Prices do not go up forever. You need to have someone who understands markets to get this. Mitch Daniels did when, three years ago, he acquired Kaplan University, one of those dreaded for-profit colleges. Kaplan is on-line (imagine), though the stated purpose of the acquisition was not to be another University of Arizona and would not compete with on-campus learning of the standard undergraduate. As he called it, “This is for adults who will never get the chance to go back to campus”. Mitch is one smart SOB. By framing the purchase that way, he largely avoided a conflict with his faculty, who would still have the “monopoly” on late teen undergraduates. If the faculty believes this, the faculty will be proven wrong. Mitch wanted an entree to on-line learning platforms that he was unable to develop in house. Kaplan provides that entree. The guy is prescient.

    • I respect Mitch Daniels and actually wonder why his model is not spreading – must be something we don’t know.

      As far as traditional higher ed – you say change is coming… and I’ll put my money on “customers” climbing all over each other to enroll back in the standard on-campus 4 year product – college life, sports, etc, etc..

      I’ve always said – and still do – there is a plethora of alternative paths to an economically viable college education and quite a few people do it but the demand for that standard 4-yr on campus experience just will not die – in no small part because parents who did that – want it for their kids.

      If you want to compare – don’t forget Liberty – the largest college in Virginia that offers BOTH on-campus and online… someone down that way has to have some Mitch in them…..

      😉

  3. In Charlottesville there is an “empty spot” where the statue of Robert E Lee once stood. That “empty space” should be filled with a statue of Helen Dragas.

  4. This is absolutely true. When sweet briar cut their “sticker price” from the mid 50,000’s to 36,000, the price that I actually pay in tuition and fees went up because I lost 3 scholarships over night, simply because the school couldnt afford for those scholarships to exist anymore.

    • It’s almost like buying a ticket on an airline, ain’t it? In fact, it might actually be worse. Maybe, they’ll limit number and weight of suitcases in the dorms with overage fees next.

  5. Jim, I’ve come upon this a couple of days late and what’s striking to me is the lack of comment this post provoked. There is so much to be said on this topic, and it raises so many controversies within higher ed. Thanks again for bringing it up.

  6. History will record that America’s higher education was the fountainhead of all the ills and disease that destroyed America over a period of some sixty years. It will take a very long book to describe all the ways.

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