Economist Phillip B. Levine, a Princeton and Cornell graduate and a former senior economist at the White House Council of Economic Advisers, currently serves as the Catherine Coman and A. Barton Hepburn Professor in the Department of Economics at Wellesley College, a research associate of the National Bureau of Economic Research, and a nonresident fellow at the Brookings Institution. Levine is a man deeply familiar with the field of economics and how markets work. He is also a father, and as a parent he understands the value of higher education. He began putting money in his children’s college funds soon after they were born, but as they came of high school age, he realized that he had no idea how much he needed to save. To form such an idea would require knowing (1) how much college would cost, (2) whether his family would qualify for financial aid, and (3) how much financial aid his family might qualify for. Finding it impossible to answer these questions, Levine came to the following realization: if someone of his experience and background could not figure out the answers, what hope was there for other people? Levine’s latest book, A Problem of Fit: How the Complexity of College Pricing Hurts Students—and Universities, analyzes these problems and offers clear policy solutions that might fix them.
The challenges Levine identifies largely revolve around the idea that the higher education industry generally fails to operate as a competitive market. In competitive markets, price levels are set by the interplay between supply and demand, and consumers pay the market-determined price. However, because colleges and universities have market power, can infer a consumer’s willingness to pay from financial aid forms, and offer a product that cannot be resold to a different consumer, they are able to maximize profits through price discrimination. Accordingly, a school’s listed sticker price is not the price a student is likely to pay, but rather a price ceiling. Levine argues that the lack of competition in the higher education market creates inefficiencies that ultimately harm consumers.
The harms identified by Levine include lack of pricing transparency, lack of affordability, and confusion around the application process. By failing to communicate to potential students the amount they will have to pay after financial aid, schools create confusion that affects college-choice decisions. Financial aid does not cover the needs of the poorest students, often requiring them to make choices that may negatively affect their academic performance (work) or financial well-being (student loans). The process of applying to college—from evaluating schools, to preparing for and taking entrance exams, to completing applications—is so burdensome that those with means often hire advisers and those without may rely on nonprofit organizations for help. Higher income students may be able to throw money at these problems, but lower income students may be forced into suboptimal school-choice decisions or deterred from going to college at all.
Rather than merely describing the problems, Levine offers potential solutions. The major fix he offers is doubling the size of the maximum Pell Grant award, which would both decrease the student-loan burden for lower income students and increase the share of students eligible for the award. Other solutions discussed in the book include increasing state spending on higher education, raising tuition, and encouraging collusion across institutions. The author admits that the last two solutions seem paradoxical, but he asserts that they would have a positive impact. Increasing tuition would allow universities to extract more revenue from higher income students while increasing aid for lower income students. In addition, collusion would reduce the number of merit awards going to higher income students.
At multiple points in the book, Levine discusses free college as a potential fix to the pricing system. But he ultimately concludes that free college would be a bad policy, asserting that tuition-free public schools would unduly benefit higher income students, both by giving them the opportunity to attend college for free and by forcing private schools to lower prices to reduce their competitive disadvantage. Moreover, he notes that making colleges tuition free is unnecessary because college education is worth the cost.
As evidence of the value of college education, Levine points to several financial and nonfinancial rewards associated with an undergraduate degree. He cites BLS data showing that the average worker with a bachelor’s degree earns nearly 65 percent more than a worker with a high school diploma. College graduates earn $420,000 more over their lifetimes, which compares with a 4-year tuition sticker price of $115,000 at a state flagship university, or $268,000 at a highly endowed private university. Levine also reports that, apart from reaping financial benefits, college graduates gain “intellectual fulfillment, personal growth, and personal connections.” Therefore, while the cost of a degree is substantial, the benefits that accrue to college graduates are well worth the investment.
A Problem of Fit is an interesting book that offers several reasonable policy fixes for the college pricing system. The author makes his case with enough technical data to satisfy any policy wonk and presents cogent analyses accessible to the lay reader. I would recommend the book to anyone concerned with college pricing, as well as to people interested in learning more about the higher education market.
United States Department of Labor
