Financial Aid

Colleges often price discriminate with tuition. At many expensive colleges only about one-half of the students pay the full cost of tuition; the rest get some financial aid.

Many colleges use financial aid packages to attract favored students. Since colleges have limited financial aid budgets, they should maximize the recruiting benefit per dollar of financial aid.

Poor students care more about college prices than rich students, and so poor students are consequently more price sensitive than their more affluent classmates. Imagine that Smith College is trying to attract two students of equal talent. If Smith can give only one student a $10,000 tuition grant, then Smith should give it to the poorer student, since the grant is more likely to induce her to attend Smith.

Colleges can price discriminate far more easily than businesses. If a bookstore tried setting higher prices for lawyers than, say, economists, the economists would simply buy the books for the lawyers. When a college offers one student a substantial amount of financial aid, however, the student can’t give her aid package to someone else. Furthermore, colleges require students to submit financial information such as their parents’ tax returns, allowing the schools to figure out whom they can charge the most. Since businesses rarely have access to their customers’ tax forms, firms must devise alternate means of determining which customers are worthy to receive discounts.