Who Wants a Discount College?

A blog about business and economics.
Sept. 4 2013 2:23 PM

Who Wants a Discount College?

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Fancy.

Photo by PATRIK STOLLARZ/AFP/Getty Images

Whenever I read about "college costs" I feel like the analysis tends to leave out some simple and fairly obvious points about the consumer demand side of things. Imagine a scenario where you travel out of town on work and end up meeting up with an old friend you haven't seen in a while. He's a prosperous professional—a lawyer at a local firm, say—but not a top 1 percent master of the universe type. Basically, a guy with some discretionary income to blow but not someone who can just be indifferent to what everything costs. You're surprised to see him roll up in a surprisingly fancy car and remark "wow, nice car!"

Imagine the following replies:

1. Yeah, I got an amazing deal on it. Apparently this color was wildly unpopular for some reason but I didn't mind and got it at a great price.
2. Yeah, we had a blockbuster year at the firm so I decided to splurge with the bonus.
3. Yeah, after Hannah finished college Marie and I decided to downsize to a smaller house and buy ourselves fancy cars with the extra money.
4. Yeah, we found out about a discount college that provides 95% of the educational value of traditional college at half the price so we sent Hannah there and bought fancy cars instead.
5. Yeah, I probably shouldn't have done it and I definitely shouldn't be telling you about it but I got a bit of a hot stock tip from a client and bought this with the proceeds.
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I feel like you can easily imagine someone saying four of these things to an old an friend, and the one I can't imagine isn't the one where you confess to a crime. People like to brag about getting a good deal or making savvy financial moves. People do not like to brag about shortchanging their kids' education. "The Kids" is everyone's favorite thing to spend money on. There's a powerful biological impulse to transfer resources to one's children, and there's a strong social convention that doing things for the sake of your kids is desirable.

The era of huge across-the-board increases in college tuition is probably over despite this. The market of rich people isn't that big, middle class families are out of money, and politicians have gotten tired of spending money on higher education. Schools serving the mass market will have no choice but to do more to constrain the prices that they charge. But if you look at the market for private high schools, I think you'll see that among the minority of American families who do have a lot of money there's essentially no limit to the amount of cash they're willing to blow on school for their kids. The money doesn't even really have to pay for quality as long as it pays for exclusivity and highly visible signals of quality. And if middle class incomes ever do start rising strongly again, I bet we'll see colleges and universities shift gears back to "gobble up all the money" mode. For it to be otherwise, parents would have to be willing to make explicit tradeoffs between higher education and other kind of discretionary consumption goods and I just don't think they will.

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