Should all college majors pay the same tuition?

Despite all that is written about the costs of higher education and how student debt is crippling an entire generation, college remains a solid investment for most students. The Bureau of Labor Statistics indicates that people with bachelor’s degrees earn about $1,173 on average each week while those with only high school diplomas earn an average of $712 per week. That is a difference of $461 per week, about $24,000 per year, and about $958,880 over a 40-year working lifetime. On average, four-year college graduates literally are about a million dollars better off in their lifetime than those that stop their education after high school.

This calculation suffers from a selection bias, as individuals that choose to go to college likely have higher earnings potential that those that do not, independent of their education, so it is not appropriate to credit the colleges entirely for the million dollar increase in value. But, at pretty much any tuition level it would be hard to argue that college does not pay off for most graduates.

This helps put the student debt debate in perspective. The average student debt is about $30,000. A typical U.S. college student goes $30,000 in debt to gain a credential that will earn an average of about $1,000,000 more over his/her lifetime. College costs are far too high, have grown considerably faster that colleges’ ability to increase value, and limit many worthy students from being able to furthering their education. Yet, college remains a stellar asset for most.

These calculations concentrate on an “average student” and much can be lost by doing that. About 1 in 5 college graduates carries more than $50,000 in loans. About 1 in 20 has more than $100,000 in loans. Not all college graduates make a million dollars more over their lifetimes. Plenty of students slip through the cracks and many are underemployed because of a mismatch between their training and what employers demand.

Many young people are in financial trouble because college is not an investment that is paying back quickly enough for them. There are too many students who begin college, take on debt, and never graduate and gain the credential that enhances their earning power. The most hidden statistic in America may be that only about 60% of those who enroll in college end up graduating.

There is an enormous disparity in the average starting salary for college graduates depending on their major and their college. When thinking of the financial aspects of college, parents and students would be wise to look more at the debt to earnings ratio rather than concentrate solely on the costs of college. That is, what will an expected first year salary be and what will the expected college debt be?

A rule of thumb is to try to get this ratio as far under 1.0 as possible, and to not let it go over 1.0. This means that students should seek to have loans that do not total more than their expected first year salary, and hopefully loans that are just a fraction of their first-year salary.

Data from the Department of Education’s College Scorecard shows average student debt and average first year salary by college and by major. What is striking is how much variability there is on the salary part and how little there is on the debt part. Broadly speaking, salaries vary widely by college and major, but the debt students end up with does not vary nearly as much.

Suppose you owned a business and two customers walked into your door. For customer A, you provide a service that is worth twice as much as what you provide to customer B. Would you charge both customers the same amount? Probably not. They would not expect you to even if it cost you the same to produce both products.

However, that is what colleges do. In the College Scorecard data, the most lucrative college majors result in starting salaries that are about two and a half times greater than the college majors that result in the lowest salaries. Yet, students graduating with these degrees all end up with similar levels of debt and pay similar tuition along the way.

Why? Why would colleges charge the same for a student who can expect to make $75,000 per year upon graduation the same as one that can expect to make $30,000? Colleges are pricing solely off the supply curve and ignoring the differences in demand among subgroups of students.

I have discussed this idea with many people including some who work in higher education. I have not found even one person that supports the idea of colleges charging different tuition rates for different majors, but I also have not heard a cogent argument against it.

This idea would provide an efficiency to the labor market. If too many students chose a particular college major, resulting first year salaries will decline because there will be an excess supply of job seekers in the market. This will cause fewer future students to flock to this major and cause colleges to adjust their recruiting tactics and tuition prices. The market would provide a clear financial signal to colleges that would help them adjust their program sizes appropriately. The incentives would be in place to produce the right number of graduates from each major.

Students majoring in traditionally higher paying fields, like engineering and computer science, would end up paying more. Those in traditionally lower paying fields, like arts and human services, would pay less. All would be paying a fair amount tied to their future earning potential and the value the degree provides. You could argue that in the current system students enrolled in liberal arts are subsidizing those enrolled in engineering. Currently, because pricing isn’t in equilibrium across majors, many students are unable to attend because their preferred major will not pay off for them.

A few years back there was a proposal in Florida to have differential pricing for different majors at state institutions. However, this proposal was not letting the market determine pricing. Instead, it sought to lower the cost of STEM majors in an effort to draw more students to STEM majors. This would result in a glut of STEM graduates and lower starting salaries for these students. Counter to the current political discourse, it is the case that salaries in STEM fields have been growing at a slower rate than other college majors on average, which is the market saying that we have too many students pursuing STEM, not too few.

Differential pricing would likely be good for the colleges as it would maximize revenue and would help colleges get closer to the equilibrium price for each student. There is a reason why everyone on an airplane seems to pay a different fare – it maximizes revenue to the airline. Differential pricing is most often seen in businesses with high fixed and low marginal costs, which perfectly describes today’s traditional colleges. Differential pricing would also help colleges allocate costs more efficiently, as resources will flow to the demand.

This is a radical idea that I don’t think has ever been tried. The best argument I have heard against it is that it has the potential to limit students from poorer households to the pursuit of lower paying majors and to draw richer students to the higher paying majors, thus perpetuating a disparity. This could happen, but is more of a temporary cash flow issue that can be resolved with intelligent public policies.

Students need access to the capital necessary to get them through the college years and assurance that their resulting debt will be connected to their future earnings potential. That is where college financial aid offices and government support of higher education should place their focus. Students with ability and without financial means need temporary help getting them to a position where they have a job offer and a reasonable amount of college debt. We all have a stake in getting them to that point.

Let’s charge students a fair price that is determined by the value they receive from colleges and concentrate our public support on being sure they have a financial bridge from the moment they leave high school to when they graduate college. Linking their personal financial stake to their expected earnings is inherently fair, helps balance the labor market, and will cause colleges to provide training that is in demand by employers.

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