Rubbing It In

Most private colleges now have a sticker price of $40,000 to $45,000 per year (tuition plus room, board, and miscellaneous), or $160,000 to $180,000 for four years. They then discount off this absurdly high price for most families earning less than, roughly, $120,000 to $160,000 per year. The colleges don't call this a discount, and prefer to trumpet their charitableness. Yet, of course, to anyone who took Econ 101, "financial aid" is just another name for the profit maximizing strategy of "price discrimination," or getting each customer to pay the maximum they can.

In theory, price discrimination is an ideal way to extract the most money from customers, but in most businesses it's hard to execute in practice. For instance, if you try to charge rich people more money for their groceries, they could hire poor people to shop for them. Or they could just dress in ratty clothes when they go to the store. See, a major problem with price discrimination is the difficulty of figuring out how much each customer could pay. That's why in practice it usually turns out to be limited to things like giving seniors a lower price at the movie theatre.

The enormous exception are colleges, who insist that you fill in financial disclosure forms (the FAFSA and the "Profile") even more intrusive than the IRS's 1040.

The Achilles heel in this system of price discrimination would appear to be competition. Since the Sherman Anti-Trust Act of 1890, it's been illegal for firms to form cartels to coordinate pricing. If rival businessmen meet in a parking garage at midnight to decide on common pricing, they can go to prison. But, don't worry, the colleges have that covered. US News & World Report writes:

The 568 Group. This newcomer on the financial aid scene is made up of 28 of the nation's top colleges, including Amherst College, the University of Chicago, and Columbia, Duke, Georgetown, Rice, Stanford, and Yale universities. (Four of the Ivies are not participating: Brown, Dartmouth, Harvard, and Princeton.) The group, named after a law that waives antitrust provisions to allow the members to meet, --

The other name the colleges considered for their 568 Group was the Nyah-Nyah-Nyah-We're-Above-The-Law-And-You're-Not Group, but they decided that "568 Group" was more amusingly insulting. USNWR explains that the 568 Group

wants to lessen the confusing variation in offers by requiring aid officers to use the same method for determining need.

Don't you just hate it when one college offers to lower your tuition payment by $10,000, a second college wants to knock $15,000 off, and a third offers $20,000 off? It's so confusing trying to figure out which of those three numbers is biggest! But, now, thanks to the 568 Group, all three colleges will offer you $8,000 off! Isn't that less confusing?

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If you have kids, financial planning for college is a fraught process, since your incentives run in opposite directions:

- To minimize taxes, you want to put assets under your child's name, including the federal income tax exempt 529 accounts.

- To maximize financial aid, you want to minimize your child's assets, since colleges will "tax" them at the rate of 35% per year, as compared to imposing a tax of only 5.6% on your assets (and they won't touch your retirement IRAs, 401ks, and SEPs).

If you are so rich you won't qualify for financial aid, you should shove money into your kid's name. And if you are poor enough that you know you will qualify, you should not put anything under his name (and don't let Grandma open an account in his name either).

If you are anywhere in the middle, you should play around with the Expected Family Contribution calculator provided by the College Board. Run different scenarios for what you expect your income and assets to be the year before your child goes off to college.

My published articles are archived at iSteve.com -- Steve Sailer