Editor’s note: In recent years, concerns regarding runaway college tuition and student loan debt have served to undermine public confidence in the value of American higher education. Ironically, the very issue that is now causing such alarm—high tuition—has long been a signature feature of the financial model intentionally employed by the vast majority of smaller private colleges in the United States. The Center for Vision & Values sat down with Dr. P. Jesse Rine to discuss his new white paper about tuition discounting, “A Shell Game by Any Other Name.”

V&V: Let’s start with the basics. What exactly is tuition discounting?

Dr. P. Jesse Rine: Tuition discounting is a student recruitment strategy used by nearly every private college in the United States. Here’s how it works: A college will publish an artificially high tuition “sticker price.” It will then offer large discounts to prospective students in the form of institutional grants, which are often presented as merit scholarships. In this “high-price/high-aid” model, virtually everyone receives an institutional grant, though the award amount varies from student to student, of course.

V&V: Where do colleges get the money to offer all of these tuition discounts?

Rine: That’s a great question. While it appears to students and families that colleges pay for tuition discounts with institutional grants, in reality, only a small portion of these “scholarships” are funded through endowment or donations. To cover the cost of the unfunded grants, colleges collect excess tuition payments from students.

V&V: So, if tuition payments fund the majority of institutional grants, are you saying that students actually pay for most of the discounts?

Rine: Yes, that’s exactly right. To pay for unfunded grants, the college collects a tuition surplus from one group of students to offset the discounts offered to another group of students. For instance, in our earlier example, if a college wanted to incentivize in-state students to enroll by offering a tuition discount, it would have to offset that discount by charging a higher tuition rate to its out-of-state applicants. One commentator has called this phenomenon the “classmate subsidy,” because in the tuition discounting system, some students pay for not just their own education, but also part of their classmates’ education. To make matters worse, because students often finance their tuition bills with student loans, many of these tuition discounts are funded by borrowed money.

V&V: Do most students realize that they could be paying for someone else’s tuition discount?

Rine: Unfortunately, most students have no idea that they could be paying more so that their classmates can pay less. Colleges do not typically disclose their use of unfunded grants to prospective students, and most students do not understand that they could be paying a classmate subsidy even if they have received an institutional grant from the college. If the college has a high average discount rate, a student could receive a large merit scholarship but still end up paying a classmate subsidy. Because colleges typically do not publish their average tuition discount, students have no reference point for evaluating their individual aid packages.

V&V: In addition to the possibility of unwittingly paying a classmate subsidy, are there any other ways that tuition discounting affects students?

Rine: The high-price/high-aid model essentially presents higher education as a retail good and encourages students to view college as a commodity to be purchased. This, in turn, shifts the college search focus from finding the best possible institutional fit to securing the lowest possible price. Of course, cost is an important factor in any student’s college decision, but institutional fit has long been understood as a key driver of student retention, persistence, and graduation—all of which are prerequisites to fully realizing the educational value of a lower tuition rate. If I enroll in a college just because it offers me a low tuition rate, but I have a hard time settling in and I don’t feel like I belong there, chances are that I will not finish my degree. Here’s the bottom line: a good price is a good deal only if the college is the right fit.

V&V: What steps could be taken to reform the tuition discounting approach to college pricing and financial aid?

Rine: A basic first step is for colleges to reset their published tuition rates to more accurately reflect the true cost of education. Colleges should also adopt truth-in-advertising measures that disclose to students how much of their tuition will be used to support their classmates’ unfunded financial aid packages. To ensure transparency and fairness for all students, however, colleges must discontinue the system of surplus and subsidy created through the use of unfunded grants.

V&V: Are there any colleges that do not subscribe to the high-price/high-aid model?

Rine: A handful of colleges have experimented with tuition resets, but it is rare to find a college that does not use some form of the high-price/high-aid model. My own institution, Grove City College, is one of those rare exceptions. The college has historically taken the view that no one student should pay for the education of another, and it uses what could be called the “low-price/low-aid” model. The college sets its tuition rate according to the requirements of its operating budget and works hard to keep its costs low. In addition, the college does not use unfunded grants and classmate subsidies; all of its institutional grants are fully funded by its endowment or donations. In the Grove City model, the published tuition price is the real price—not an artificially inflated sticker price—and the scholarships are real cash awards—not unfunded discounts paid for by other students.