January 30, 2007

College financial aid applications: as much privacy as a proctological exam

Our Endangered Right to Privacy is a favorite topic of newspaper editorials and long op-eds. Yet, I don't recall ever seeing anyone point out that the extraordinarily elaborate process of applying for "financial aid" from colleges tramples all over your privacy. This says a lot about the deference paid to the college cartel by the American upper middle class.

As you know, colleges set their sticker prices by picking some absurdly high figure, like $46,732 per year, then discount like crazy, although they call their discounts "financial aid." But, they discount the way economic theory predicts a monopolist would - by perfect price discrimination, setting the profit-maximizing price for each potential customer. You learn in Econ 101 that in the real world, this theoretical result is seldom achieved because firms can't obtain all detail necessary about each customer for setting the perfect price. If your econ professor has s a rogue wit, he will then point out that there is a single exception: American colleges, which insist upon complete financial disclosure from applicants for "financial aid."

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


Leonard said...

Resalability is also a big issue for most would-be price discriminators, along with the related issue of amount demanded. Educations are perfect goods in both respects: everyone wants one, but nobody can resell his education.

It doesn't matter how much info I can get on you, if I'm selling cars I can't charge $100000 for a Honda then mark it down a variable amount after gathering information. Thus it's not worth trying for many reasons, not just the difficulty in getting the info.

I think that many Americans would disclose just about everything about themselves for $5000.

James said...

Also tax cheats get more financial aid.

Grumpy Old Man said...

This is a very important post.

Exposing Big Education as a cartel fetishistically worshipped by the New Class--priceless.

I am waiting for the antitrust suit against the NCAA--price-fixing to keep the price of college athletes' labor down.

Anonymous said...

I predicted over a decade ago that people soon would be saying "enough" to colleges and would demand lower prices. If colleges refused these demands and kept charging exhorbitant amounts, prospective students would stay away in droves.
Obviously, I was wrong.


Anonymous said...

Brilliant post.

One additional point: There isn't a tremendous amount of difference between the outrageous cost of the most exclusive schools (e.g., Harvard.) and second-tier private schools.

I noticed this when I was getting ready to apply to MBA programs last year. Since most of them would cost 2 years of my time and about $100k, I picked only top-20 schools which had track records of getting nearly all their grads good jobs. When I didn't get into any of them, I decided not to spend a similiar amount of time and money to get a lower-quality product.

It still amazes me that so many people are willing to pay so much for second tier schools -- whether undergrad or business (something like med school, where all graduates have good career prospects, is different).

Dave P.

dearieme said...

How would Americans like the new system in Britain, whereby applicants to Unversity are going to be asked whether their parents are University graduates, so that they, the applicants, may conveniently be discriminated against? Perhaps more of our youngsters will start applying to your Universities.

ziel said...

You learn in Econ 101 that in the real world, this theoretical result is seldom achieved because firms can't obtain all detail necessary about each customer...

Beyond that, it's impossible in a competetive market because other firms will surely undercut any prices above marginal cost. Now why this market, with all the colleges out there that seem to be begging for applicants, is so uncompetetive is beyond me.

Anonymous said...

I suspect that any "rogue" economist would want to have his tenure well in hand before he ventured that example in class.

Anonymous said...

Richard Vedder in his book “Going Broke by Degree” describes why and how the costs of post secondary schooling is rising. He looks to the University of Phoenix and other for profits to help but he indicates that the problem with for profit schools is that do not like to flunk their customers and so you go to for profit schools or tutors to learn stuff (like how to use MS Office, or how to play piano, how to improve your SAT score) but you need to go to not for profit schools for credentials. He proposes a separation of testing (credentialing) and schooling. Ideally the organizations that benefit from the prescreening that credentials provide like employers would pay for the testing.

BTW in the business that I am in, computer programming, a portfolio of programs written is better than a diploma to wise employers.

Anonymous said...


Which way will the Brits be discriminating? In favor of those applicants whose parents went to University, in the traditional social stasis mode? Ot in favor of applicants whose parents didn't, in service of inclusion and multi-culturalism? Of course in the latter case certain members of the nomenklatura would of course be exempt from such a handicap.

Anonymous said...

What has always struck me is how LITTLE the top schools charge.

Given the huge demand for entry to the most elite schools (top 5-6) especially from local bigshots and rich folks abroad, it suprises me that the list price isn't $150K a year. My guess is that the lower list price is consistent with the way the Feds give out financial aid support. As for the real high ticket consumers, this is where the special giving comes in. Families with political connections or those who donate >$100K or even entire buildings get preferential treatment. But I conclude schools would find it socially difficult to have a list price of $1M and say, we discount for normal rich folks and super geniuses, and we discount further for poor kids, affirmative action admits, and athletes.

Bill Wyatt said...

Since financial independence is the greatest threat to the power of our governing classes (both political and economic) it is not surprising that "circumstances" constantly conspire to keep the basic elements of that independence (like education, personal savings, housing, retirement income and health care) firmly under "social" control. The utter lack of financial privacy in the U.S. (the information demanded by financial aid forms is no more intrusive than that demanded annually by the IRS and its state analogs) is just another element of that social control through economic control, one that the average American has so thoroughly internalized that he scarcely notices. (Compare, for example, the average American's attitude toward the use of his financial information by a bank or credit card issuer with his attitude toward its use by the government or other "nonprofit" entity like a university.)

That such social control rarely benefits the average man is a surprise only to the average man. It will last as long as the average man believes that he can manipulate that social control for his net benefit. A point of view, alas, that shows few signs of diminution.

Bill Wyatt

Anonymous said...

"I predicted over a decade ago that people soon would be saying "enough" to colleges and would demand lower prices."

Peter, your prediction hasn't come true. College prices are higher than ever, and so is the demand for the education.

If people are demanding anything, it's not lower prices but rather government aid to help pay the high prices.

Anonymous said...

What part of Peter's "I was obviously wrong" do you not understand?

Anonymous said...

Not surprisingly, Harvard University organized the cartel (at first among the Ivies and similar schools). They started it in 1953/54 (see this timeline). The Federal government tacitly endorsed the cartel by the way it administered "aid" programs.

Until 1980 or so, competition from State colleges and universities held down tuition everywhere. (For example, in 1980, tuition at UC Berkeley was only about $750/year for CA residents.)

However, State schools had joined the financial-aid cartel in the 1960's and 1970's to make their students eligible for Federal assistance. For various reasons, State schools' charges escalated rapidly (4 times CPI) in the 1980's and 1990's (UC Berkeley now costs residents $7,800/year--it's $26,480 for non-residents), allowing tuition to rise everywhere. The Federal government added fuel to the fire by guaranteeing and promoting student loans. Soon all colleges charged each student as much as he and his parents could possibly scrape together or borrow.

Of course, the financial-aid cartel was unlawful, so when the scheme became really crushing students sued under the antitrust laws. They were winning, when...

Colleges got Congress to exempt them from the Sherman Act in 1997 (on the curious condition that they eschew all merit-based aid).

Yale University offers a short yet very fine summary of the legal situation.

The antitrust exemption is supposed to sunset in 2008. It was supposed to sunset in 2001, too--but Congress extended it. I wouldn't bet against another extension.

Worst of all, colleges are just as inefficient as a student of economic history would expect members of a perfect cartel to be. They have plowed virtually all of their excess profits into bureaucracy and wasteful status displays.

Every time the (Federal or State) government increases subsidies to students, the cartel absorbs the money without increasing output at all. (Of course, other rent-seekers suckle at the "student
financial aid" teat--
banks, for example, which make guaranteed loans at high interest rates to captive customers.)

Steve Sailer said...

Thanks, Mark.

Anonymous said...

The comments on this blog are getting better and better. I enjoy reading what intelligent people think about various problems and how to solve them. This, espeically so since they dont have to be "politically correct" about their proposed solutions. Good stuff.

Anonymous said...

The problem (which, BTW, Half Sigma here has discussed extensively) is that there is no substitute for a Harvard degree when applying to law school, investment banking jobs, television, or any number of other elite employment tracks. So these places can charge as much as the market will bear. They don't in order to mitigate charges of elitism.

As for the second-tier schools, a pricey private school might still give you an edge over a state school--not as big as the edge Harvard would give you, but still present. So rich people will pay for it.

Markku said...

For more criticism of the American model of higher education, see Fred Reed's scathing columns on the topic. By the way, I agree that credentialing and schooling should definitely be disconnected.

Finland probably has one of the most beneficial system of higher education from the student's and their families' point of view in the world. All universities are public and there are no tuition fees. Each student gets a benefit worth about $300 a month for the duration of months depending somewhat on the degree and a housing subsidy that covers 80% of the rent up to a reasonable but lowish limit.

From the tax payers point of view, our system is not as good, since a lot of students don't work as hard to graduate quickly as they would if the time and the courses they took were costing them money.

dearieme said...

Simon, the children of British graduates will be discriminated against. (With, I dare say, the exceptions that you mention.) Rather a Soviet ring to it, don't you think?

Anonymous said...

"there is no substitute for a Harvard degree when applying to law school, investment banking jobs, television, or any number of other elite employment tracks"

Not only that, but if you are smart and educated and you want your smart children to meet (and hopefully marry) other smart children from educated families, an elite college or graduate school helps.

Anonymous said...


If the Brits only want to school the dumb kids, by all means, send the smart ones here! Polite, law-abiding, and a funny accent, what more could we ask for?

Anonymous said...

Credidentialing or a test given to graduates of certain subjects would probably be resisted greatly by Harvard, Yale, etc al.

I have a deep suspicion that if upon graduating with a systems degree from Harvard, if a graduate was forced to take a test that would be exactly the same as a student graduating from a systems program in North Carolina, the difference would actually be pretty smallish between them.

Im a huge believer that standardized tests are the best things possible to "show what you know". After a few years of the Ivy League graduates only modestly doing better in MBA-post grad tests and the like, they'd be forced to lower tuition or start really losing students. If people like George Bush can get into Yale, Im sorry, but I refuse to believe it could be all that hard.

Anonymous said...

If the entrance requirements are high enough, the education doesn't have to be any better. Given a population of obsessive-compulsive workaholics with 145 IQs, you can probably teach them most topics by handing them the textbook and some recorded notes.

Anonymous said...

Two advantages of a private college -- even a second-tier school -- are smaller classes and easier grading. Both can help one get the GPA needed to get into top grad schools. Of course, one can get some of those same advantages at a community college, and then transfer to a prestigious school.


Anonymous said...

Business is about connections and personality, not knowledge. Yale has poor bar pass rates and people still want to go to law school there.

Anonymous said...

"Not only that, but if you are smart and educated and you want your smart children to meet (and hopefully marry) other smart children from educated families, an elite college or graduate school helps."

But if you're smart and educated and you want your smart children to have your grandkids, you should try as hard as possible to get them to marry someone who isn't a smart child from an elite, educated family, or, heaven help us, a grad student.

Anonymous said...

7:08 AM Anonymous wrote: "Business is about connections and personality, not knowledge. Yale has poor bar pass rates and people still want to go to law school there"

This is EXACTLY what Im talking about............poor bar pass rates from Yale.

Folks, do you ever get the feeling the whole Ivy League cartel was intentionally formed so the rich could send their kids to so-called "elite" schools, where academic scholarships could be given out to some of the "truly gifted", who would of course go on to do great things, and the "elite's" children could say "I went to the same school that has produced X-amount of nobel laureates, etc.?" Its "elitism-by-association".

My "disrespect" of some of these colleges are based on a couple of personel experiences with Vanderbilt alumni at school and work life. Ive met some who were impressive. However, Ive met a few who WERE NOT impressive and didn't strike me as intelligent AT ALL. It never has escaped my mind that Bill Gates and Warren Buffett came from what they came from, and the fact that Gates was a college drop out. Say what you want about his operating system and its faults, but he has made himself the world's richest man, and did it without all those Ivy league connections (the biggest attribute of those schools?), when we all know that so many graduates of elite schools set out to do the same thing................and look who has "won".

The bar exam is just one example of a "standardized" test that should be given to grads of schools. We could seperate the wheat from the chaff this way, and also induce schools to lower tuition over time.

Anonymous said...

Careful. The Ivy League is a meritocracy attached to an exclusive social club. Separating the two might ruin the meritocracy and make the country even more of a connections-fest than it is now.

Sometimes imperfect institutions are better than any alternative. (Very conservative, BTW!)

Anonymous said...

sfg said something very profound.

All the AA, legacy, athletic crap allows HYP to support a meritocracy while deflecting social criticism. Certainly they have done a better job than Chicago at building up power and money despite Chicago's unrelenting emphasis on hard work and intellectual meritocracy.

Moreover, the grad programs (Phd, not JD or MBA, which I call professional) are overwhelmingly meritocratic. They focus almost exlucsively on test scores, grades, letters from top people, and substantive classes. ECs and diversity count for nothing.

So I think that the top grad research of the elites -- which is the envy of schools the world over -- is easier to support because the Ivies also cultivate the social elite, giving them a comfy playground for 4 years before heading off to Goldman or a top 5 law firm.

Believe me, admissions committees know the difference. And professors seem to feel the unfairness of accepting the social butterflies buys them the power to sequence the genome or crush particles to their hearts' content.

Sad, but perhaps inescapable.

Anonymous said...

"BTW in the business that I am in, computer programming, a portfolio of programs written is better than a diploma to wise employers."

Not around here it isn't.

I am not a big programmer. i know many who are, and even before H-1B assassinated that career field employers were notoriously picky when filling programming slots. Simply put, pure programming is way overcrowded. There has not been a genuine shortage of programmers since the early 1980s. The only exceptions are for security cleared jobs (almost all of which are unspeakably boring, and few pay Silicon Valley money) and extreme niche specialties, which no one will devote themselves to for good reason (when the niche dries up they won't work anywhere: it will be held against them.)