August 9, 2017 9:23AM

Rich Kids and College Tuition

Last week, the Trump Justice Department announced that it would scrutinize colleges' consideration of applicants' race in their admissions decisions. The announcement suggests the DOJ's current leadership believes school policies intended to boost enrollments of some minority groups violate anti-discrimination laws and improperly reduce admissions for other groups.

Over the weekend, Washington Post columnist Christine Emba responded that "Black People Aren't Keeping White Americans Out of College. Rich People Are." She argues that some wealthy parents "buy" their kids' way into selective colleges when those kids don't have strong applications. As a result, fewer seats are available for non-wealthy kids with stronger applications.

Regardless of what one might think of the consideration of race in the application process, one should understand that Emba's analysis is incorrect. "Rich kid admissions" help non-rich kids to attend college, and reducing the number of enrolled rich kids would reduce the enrollment of other students, whatever their demographics.

Last year, Regulation published a pair of articles debating the Bennett hypothesis, the idea that colleges raise their tuition and fees whenever government increases college aid to students. One of the articles, by William & Mary economists Robert Archibald and David Feldman, includes an insightful discussion of the economics of college admissions and price setting (i.e., scholarship decisions).

Selective colleges practice what economists call price discrimination, in which admissions and prices are set with an eye to a student's willingness (and ability) to pay--what schools politely call "need aware" admissions. Applicants with limited admission prospects but who have wealthy parents may be admitted, but they will be charged a high price. These are the kids and parents who pay the staggering $50,000+ a year "list price" that selective private schools are quick to say that few of their students pay. Most other enrollees, on the other hand, had applications that admissions officers considered more desirable, but the students had less willingness to pay, so they were awarded scholarships, i.e., large price discounts. The discounts, in turn, are financed in part by the high prices paid by the rich kids and their parents.

Archibald and Feldman explain:

In order to meet revenue and enrollment goals, almost all selective programs admit and enroll students with lower admission ratings [than their ideal applicants]. Knowing the odds of enrolling students with successively lower admission ratings, schools can eventually craft a class with the highest possible average admission rating that satisfies the tuition revenue requirement while filling the seats in the entering class. In its enrollment decisions, a school may find that many of its [mid-tier applicants] have a higher willingness to pay than many or most of the [top tier]. These lower-ranked applicants have fewer opportunities to earn merit scholarships at more selective schools, and many come from high-income families that do not qualify for need-based aid. For some schools this means that a student from the [mid tier] with a very high willingness to pay may get preference over a student from [an upper tier] with a very low willingness to pay.

If the rich kids were denied admission, then fewer non-rich kids would gain admissions because schools would have less money to subsidize them. And the students who would attend would have to pay higher prices because, again, there would be less money to subsidize them.

It may be frustrating that rich parents buy their kids' way into college. But it would be far more frustrating if many of the non-rich kids who benefit from those payments were to lose their way into selective schools. So, contra Emba, rich kids aren't taking seats away from non-rich kids, they're helping to put non-rich kids--black and white--through college.