Why Do Colleges Get Away with Price Gouging and Predatory Lending Practices?

Jay Stooksberry, who used to work in college admissions and financial aid, has written a very provocative piece that deserves attention: “Selling Higher Education is Sleazier Than Selling a Used Car.”

In a previous life, I worked in sales. But not just your everyday, run-of-the-mill brand of sales: I worked in a sleazy industry that championed predatory lending practices and distorted the pricing of its lackluster product, which often sent my clients spiraling down a rabbit hole of debt. And to make matters worse, this entire enterprise was buoyed by your tax dollars, so—regardless of macroeconomic patterns—this dubious marketplace remains untouchable.

What was this ethically questionable industry? I worked in higher education.  More specifically, I worked in college admissions and financial aid.  …

The gig was not only physically exhausting, but also morally. What once seemed like an altruistic mission—helping the young people of today become the leaders of tomorrow—transformed into a much more realpolitik mindset. Slowly, I realized my job wasn’t to empower young people, but to get them and their parents to commit to paying a very large sum of money—either by cash or credit—for a little piece of paper that continues to diminish in value.

The Markup on College Tuition

The markup on college tuition is astronomically higher than the markup on a car.

Product pricing always comes with a little fudge room. Many refer to it as markup. This is just a given in the world of sales and retail. That wiggle room allows sales reps the ability to offer “one time deals,” which serve as an effective call-to-action when closing the deal.

In the higher-ed world, we refer to this wiggle room as “discounting.” Discounting is the act of advertising an astonishingly high rate of tuition, then bargaining with scholarships, grants, loans, and other forms of financial aid until the buyer finds a less painful price point that is still astonishingly high, but still lower than before.

Sticker shock is a very real thing in the college admissions gig. During my tenure in higher education, annual tuition at my college was roughly $30,000 per year. But it didn’t stop there: cost of living also included $4,000 for room, $4,000 for board, $750 for books, and $2,500 for other residual expenses (insurance, vehicle maintenance, etc.) that families should include in their annual budget. When it was all said and done, that annual amount exceeded the $40,000 waterline—and this was only for one year.

American higher education is caught in a vicious cycle of robbing Sophomore Peter to pay Freshmen Paul.

Plus, to make matters worse, tuition always rises as if it is Newton’s lesser-known “fourth law” of motion. On average, colleges jack up tuition roughly 5 percent per year. The board of trustees at my college, for example, was committed to “generous increases” that didn’t exceed two percent.

“But don’t worry,” I told parents. “Nobody ever pays the full price.” The discount rate varied for each student, but it was easy to cut tuition in half through discounting so that it didn’t seem as bad.

A car dealer’s markup is roughly five percent above the manufacturer’s suggested retail price (MSRP). For my college, that markup was 115 percent! Sadly, this markup is average across all of the higher-ed industry.

Government Bailouts

The auto industry was only bailed out once; higher-ed makes it an annual tradition.

Even one bailout is too much, in my opinion. The auto industry was on the receiving end of a $79.7 billion handout, following the financial crisis of 2008. Though monies were paid back, the Congressional Budget Office estimates that the program still cost taxpayers roughly $14 billion.

Meanwhile, the postsecondary market is bailed out every single year. In 2014 alone, $133.8 billion in federal dollars were allocated to over 5,000 postsecondary institutions to be used as financial aid.

This aid, however, doesn’t come in the form of a federal check made out to a needy student. Colleges and universities are the beneficiaries of these funds. Once enrollment counts for the upcoming year are finalized, funds are issued to the colleges who then, in turn, manage how they are distributed.

And this annual bailout is fueling rising costs. Studies have found that federal funding directly contributes to inflated tuition pricing.

The Federal Reserve Bank of New York found that every dollar awarded by Pell Grants resulted in a 55-cent increase in the “sticker price” of college tuition for students. Anecdotally, the board of trustees at my school waited for Pell Grant amounts to be set before they officially set our school’s tuition rate. This residual effect, in conjunction with federal student aid, has continued to inflate the price of tuition year after year.

Throwing more public money toward higher education has created an opposite effect on the affordability of college. According to inflation-adjusted figures, public investment in higher education is ten times higher now than it was in 1960. For perspective, military spending is only 1.8 times higher. Meanwhile, college tuition is 1,120 percent higher during roughly the same time period.

Predatory Lending with Taxpayers on the Hook

On top of all of this, it is virtually impossible to discharge your student loans if you file for bankruptcy. Even with all of this, student loans have managed to escape the label of “predatory lending.”

Even if the bubble were to burst, think about who owns the paper on all that debt? Keep in mind that the colleges and universities already got paid. Everybody else—namely, taxpayers—will foot this bill if things went south. Those paying both income taxes and student loans are already double dipping into this postsecondary Ponzi scheme.

Congress should reform this mess before the bubble bursts by applying free-market principles to higher education financing.  Here are some ideas from economist Richard Vedder.

Peter Zeller is Director of Operations at Center of the American Experiment.