Hacker News Reader

Comment by sliverstorm | Hacker News Reader

I'm curious- if all schools were run like businesses on the open market, is there anything stopping tuition from reaching an equilibrium price close to the value of the degree (in terms of wages)?

It seems like folks will likely continue paying more to go to college so long as the boost in income is worth it, and colleges will continue to increase tuition until they can no longer get away with it, so it seems like that's where we could be headed.

Why it didn't happen before, I figure could be due to public schools setting a very low bar and private schools had to remain at least somewhat nearby. But as the government continues to pull funding from public higher education, it becomes more and more private, i.e. driven by the market.

View on HN

What you're missing are the loans. College loans are cheap money, which change the equation so that price doesn't matter nearly as much. It's almost an identical situation as the housing bubble: people get cheap money to pay for college, with the expectation that a degree will make the loan easier to pay off in the future (just like houses never go down in value, right?).

The difference is, there's no defaulting on student loans. Even bankruptcy won't save you. And that means this bubble is going to be much harder to pop. In the meantime, colleges will keep raising tuition because there's enough cheap loans out there to sustain it, and the banks will keep making cheap loans because it's a bet they can't lose.

In theory, supply will rise and demand will fall, and they will meet in equilibrium. In practice, nothing ever reaches an equilibrium. It's often not even close.

Colleges are basically in the fashion industry, if you squint at their business models. Price can be a selling point, if it can be used as a way of signalling class or dedication, look at Gucci handbags and the Ivy League. It doesn't matter how little you can buy a handbag for, people still pay more for a top brand.

I guess it might follow the fashion industry. A few boutique providers sell "high quality" goods, to people who want to pay extra for the label. Everyone else will try to drive costs to zero. I wonder how much business process outsourcing they will end up doing? Get ready to have your tutorial papers marked by someone in another timezone ...

Remember, economics assumes rational actors. We have loads of students in school because they think they have to be, but don't treat it as an investment. For most fields, tuition is already way above equilibrium, because schools and students alike believe that demand is inelastic: either you get a degree, or you're a second-class laborer. By not having this information, they can't be rational, and continue to "buy degrees" even though MC > MB.

"...if all schools were run like businesses on the open market, is there anything stopping tuition from reaching an equilibrium price close to the value of the degree..."

Obviously: competition and alternatives. Just like the equilibrium price of a computer is way lower than what you are willing to pay for it.

Often, markets lead to lower* prices on many things as technology and processes improve in pursuit of profits.

*: If you define the value of a degree as the extra value above and beyond the next best alternative, than of course alternatives don't really factor in. But with most goods and services, there is some kind of alternative in addition to competition.

How can you determine the value of the degree? The only thing you know for pretty sure is that without degree you will have a massive problem on the job market.

With any number of arts degrees, you've still got a massive problem on the job market and now you're saddled with debt.

Good point! I should have phrased it "the right degree". I could have added "from the right school" too.

The price of a high-paying degree is approximately the cost of a poorly-paying degree, modulo the particular college.

Depends on the degree...Perhaps at the undergrad level there is some truth to this. Comparing an undergrad english degree to a degree in medicine and you can easily be an order of magnitude off.

You have to compare apples to apples.

A degree in medicine is a MD + a Bachelor's. An undergrad English degree is only 1 degree. Medical schools are their own beast, too.

Better compare the Bachelor's in English vs. the Bachelor's in Biology.

Agreed,

That's why I qualified my statement by saying:

> Perhaps at the undergrad level there is some truth to this.

Evidently this upset someone though, sigh:(

http://www.google.com/hostednews/ap/article/ALeqM5jlrhIlMeu6...

Reply on news.ycombinator.com