How Do Colleges Know How Much You Can Afford?

If you’ve ever had a conversation with students at a private college, you’ve probably realized that you all pay different rates of tuition – even though there is one official rate.

Different students pay different rates because colleges apply a method of pricing called price discrimination.

Price discrimination is a method of pricing where a product is sold based on the price the customer will pay. You might recognize it from the way an airline sells seats on a plane or a hotel sets the price of a room.

There’s a floor price and a ceiling price, but the final price offered to a student is the greatest price they’d be willing to pay for tuition so that the college can still sell them tuition.

How Do They Know What to Charge You?

Airlines use search history, customer profiles, and algorithms to sell a plane ticket. But how do colleges determine whether to charge a student the full rate of tuition or tuition at a 62% discount?

According to Ian Fillmore at VoxEU, colleges use US financial aid data from FAFSA to determine a student’s willingness to pay. This isn’t a violation of the data: FAFSA asks colleges to partner with the government in distributing financial aid to students.

Colleges have access to the six colleges an individual student applies to. They can then see the range in tuition the prospective student is considering it and can compare it with the student’s financial data.

As Fillmore points out, this works in the college’s favor because the government collects the data for them and it’s high-quality because there are punishments associated with lying on your FAFSA.

What Does This Mean for Students?

Price discrimination seems like a minor, esoteric detail in the grand scheme of higher education.

But there are consequences of price discrimination in colleges. Fillmore’s article provides insight into this through hard data.

If colleges couldn’t use FAFSA data, price variation among students at the same college would likely fall by 17%.  Moreover, the price of tuition at an elite college would drop by $825 per student every year and there would be improvements in student welfare.

However, if colleges couldn’t use this data, it is more likely that tuition for students from low-income backgrounds would rise. It’s possible that 12% of students attending private elite colleges would be priced out of their school.

Ultimately, colleges decide how much to charge you based on your real income. Whether you like it or not, it is an important part of the current education system and the way tuition and financial aid are designed will need to take it into consideration in the future.


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