Back in 1950, an "average" (median income) family sending their child to Duke University would have paid an amount equivalent to 15% of their income for the privilege. Thirty years later, the median family would have paid about 20% of their income to send a child to Duke. Tuition rose quite a bit over this time period (from $500 to $4,230), but median income almost kept up.
After 1980, Duke's tuition pulled far ahead of the average family's income. Today, Duke's tuition equates to 63% of the median family's income.
Of course, a student from a family with "median" income can expect to receive significant amounts of financial aid, most of it in the form of grants rather than loans, from Duke should they attend. The rapid escalation of tuition thus represents a fundamental shift in pricing policy. Back in 1950, universities basically charged one price to all students and expected them to pay it. Today, universities assess prices according to a sliding scale. In economic parlance, they are price discriminators. Tuition is no longer set at a level that most families can afford; rather it reflects what the wealthiest students can pay.
The turning point in the evolution of tuition, around 1980, coincides with a turning point in the income distribution. Around that time, the income of families in the top 0.1% (one-in-a-thousandth) of the distribution began to soar. Thus, while tuition as a share of the average family's income has tripled in thirty years, as a share of income for families at the 99.9th percentile, it has barely budged.
Because of financial aid, one might be tempted to dismiss the escalation of tuition costs. Financial aid keeps college affordable for average families, while price discrimination permits the university to extract plenty of cash from those who can afford it. There are three reasons to be worried about tuition, though.
- Sticker shock. Those of us in the know recognize that tuition is not relevant for low-income families, who can expect generous aid almost anywhere they go. But the low-income families themselves might not. Tuition is highly publicized; the magnitude of financial aid packages less so. Moreover, the gateway to financial aid is the FAFSA, a daunting form in dire need of streamlining.
- Families caught in the middle. At a place like Duke, eligibility for need-based financial aid runs out at family income levels around $200,000 -- somewhere above the 95th percentile of the national income distribution. In today's economy, it may be difficult to shed a tear for families at the 97th percentile, but their experience has been very different from those at the 99.9% level. Incomes for these types of professional-but-not-executive families have not changed much over the past 30 years, adjusting for inflation, while inflation-adjusted tuition has quadrupled. At Duke, about half of all undergraduates receive no financial aid -- implying that a large proportion of them are drawn from this slice of the income distribution. This may not be so worrisome for society as a whole, but elite universities really need to think carefully about putting the squeeze on such a critical segment of their customer base.
- Public perceptions. Universities and their faculty are often derided as being out-of-touch with broader society. The tailoring of tuition prices to elite income levels, the use of tuition revenue to fund country club-level amenities for undergraduates, and the corresponding under-representation of students from lower-income families on campus, do not help this image problem.
Can tuition keep rising? The easy answer is yes, so long as there are a sufficient number of families willing to pay it. Elite private universities benefit from the perception that they offer a higher-quality education than other alternatives. I like to think that this perception in fact reflects reality, but for our business model to survive it is the perception that matters. Nearly four years after the dawn of the "great recession" there is no signal that demand for a Duke education has waned.
One could advocate for deep cuts in tuition, to return back to the good old days of 1950-1980. That would require places like Duke to cut their tuition by more than half. Universities pursuing that type of strategy might receive great PR, but in reality such a maneuver would do very little to help lower-income families. Financial aid will always be the most important method of helping those families. A tuition cut would bestow benefits primarily on those families paying full price -- at the 95th percentile of the income distribution and up.
Tuition cuts -- or even just a stall in the rate of tuition increase -- are thus not justified by either market conditions or equity considerations. The escalation of tuition is based on a foundation of perceptions, however, and perceptions can change quite rapidly.
