The mystery of college costs

Why do second- and third-tier colleges cost as much as Harvard?

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By David A. Kaplan

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NEW YORK (Fortune) -- My Rolls-Royce is a lot more expensive than your Buick. A pint of Ben & Jerry's costs double the A&P generic brand. That makes sense. But when it comes to college tuition, the difference between the Harvards and the Podunks is not nearly so great.

Yale will charge $36,500 next year. Harvard, MIT, and Pomona are in the same ballpark, as you would expect. Yet so are the University of Richmond, Bucknell, and Kenyon. Due respect to those good schools, but they don't offer the same level of faculty, facilities, or cachet. Moreover, a range of lower-ranking schools, including Allegheny and Manhattanville, charge $30,000 or more.

Yes, you can get a fine education at hundreds of American colleges; not every Nobel laureate or Fortune 500 CEO graduated from Stanford or Amherst. But nobody would seriously argue that a degree from a middling university confers the same benefits as an Ivy League school or comparable elite. So how do they get away with charging practically the same price?

One answer is that they do it because they can. That's partly because supply has remained low as demand has skyrocketed - there was a "baby boomlet" in the late '80s/early '90s, and roughly two-thirds of high school graduates now go to college, up from about half in the late 1970s. And while there was a surge of interest in state schools this year as the economy tanked, many parents are still willing to pony up for a private degree. For parents like that, in fact, price may be part of the appeal. It's what's known in college circles as the "Chivas Regal effect" - a lofty price is a sign of status; discounting would tarnish the image.

Of course, many schools engage in one form of discounting: offering merit scholarships to attract highly qualified students. The Ivies and other elite schools don't offer merit aid, but they provide generous packages to the non-rich. Last year at Yale, for example, students in families with incomes of $160,000 or under paid less than half of sticker price.

The most intriguing question is why top private colleges aren't charging more. Many could hike tuition sharply and still fill their classrooms with qualified students. But if Princeton charged 20% or 40% more than its peers, it would risk not merely scaring off some families who didn't understand that they might not have to pay the "sticker price" but creating resentment among the moneyed class that paid full freight.

"There would be outrage directed at the great wealthy institutions," says Ronald Ehrenberg, a Cornell economist. He says the elite schools have made a different calculation. "They undercharge and figure they'll get it back later in contributions from grateful alumni." Who knew those Ivy types could be so shrewd? To top of page

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