Stanford just joined the ranks of Harvard and Yale in eliminating tuition for many it’s students. On one hand I think this great, and on the other hand I’m worried and concerned.  There’s no question that college is too expensive.  The average tuition for private university in 2006 was $30,367 and $5,836 at a public university.  $30,000 is a lot of money.  What’s more concerning is that college tuition consistently outpaces inflation as represented by the 6% increase in 2006.  At this rate nobody will be able to afford to send their children to a private university.

In truth the numbers on tuition are somewhat misleading.  Many families who send their children to private colleges do not pay full price.  My family didn’t pay full price for my tuition.  A combination of grants lowered my bill to about 40% of the sticker price if I recall, and loans took care of another 20%.  As a result my parents had to “only” shell out 12k a year at the time.  The sticker price for college is very different from the actual cost in a large part due to the ability of college and universities to custom tailor each family’s bill.  Colleges can charge families differing amounts based on the ability of the families to pay.

I personally suspect that University have raised their tuition not to track inflation or overall wages, but rather to track income growth at the top income brackets of America.  It’s no secret that income growth has gone disproportionately to the top.   The people who are paying full price can afford it and most likely have seen their income increase more than tuition has.  While it can be argued this is fair in the same way progressive taxation is fair (though I know there are plenty of people who don’t think progressive taxation is fair), price discrimination such as this is inefficient and distortionary.  Financial aid has become too much of game played by those who are in the know at the expense of those who aren’t.

In the end it’s not the poor or wealthy who are squeezed.  The families that suffer the most are the middle to upper middle class.  Too often I hear about families choosing not to save money because they realize they are better off trying to go for more financial aid.  What is worse  is that families are “punished” for saving too much.   I can only guess at how profound an effect these price signals have on the behavior has on different families.   I also wonder what tuition would actually be if universities actually charged everyone the same amount?  While I believe that all young adults who both have the desire and academic qualifications to attend college should be able to do so, I’m also growing more convinced that the current financial aid system might collapse under it’s own weight.  Are the declarations of free tuition by elite private universities the beginning of the end or the ushering in of a new era?