Differential Tuition Pricing Could Help Universities

July 12, 2013

In the face of declining state support, many universities have introduced differential pricing by undergraduate program as an alternative to across-the-board tuition increases. This practice aligns price more closely with instructional costs and students' ability to pay post-graduation. There is some evidence that student groups already underrepresented in certain fields are particularly affected by the new pricing policies. Price does appear to be a policy lever through which state governments can alter the field composition of the workforce they are training with the public higher education system, says Kevin M. Stange, writing with the National Bureau of Economic Research.

The provision of higher education is one of the most expensive functions of state governments in the United States, accounting for $170 billion of direct state spending in 2011.

  • Historically states have attempted to provide their residents with access to high-quality postsecondary education by providing large subsidies directly to public institutions with few directives for how the money was used.
  • Public institutions, in turn, charged all students a price well below cost, with very little price variation between in-state undergraduate students within institutions.
  • However, escalating tuition and tight state budgets have placed higher education institutions under scrutiny recently, as lawmakers debate what type of education government should be promoting and who should pay for it.

The efficacy of many of the reform efforts depends on the responses of students and institutions to changes in major-specific prices.

Universities have recently implemented explicit differential price policies by level and program as an alternative to across-the board tuition and fee increases. In a broad survey of 165 public research universities, 45 percent of schools have at least one undergraduate program with differential tuition or fees in 2008, with most implementing them in the past decade. This share was up to 57 percent by 2011.

It has been argued that differential pricing should discourage students from entering the impacted fields, holding all else constant. However, if impacted programs use the additional revenue to improve quality, the net effect on demand (of the major in question) will be ambiguous since quality improvements will increase demand.

Source: Kevin M. Stange, "Differential Pricing In Undergraduate Education: Effects on Degree Production By Field," National Bureau of Economic Research, June 2013.

 

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