Why do you need to understand the basics of supply and demand in higher education? Because paying for college is like paying for any other service or product in your life.
Higher education is a business, with its own marketplace, that abides (somewhat) by the basic principles you may have learned in economics.
The sooner you recognize this, the sooner you can start targeting schools most likely to provide the most generous merit aid.
Colleges in high demand have so many students applying, they can be more selective about who they accept.
The fact that these schools are in such high demand means they don’t have to offer any incentive for students to attend. In fact, they can charge more for students just to apply!
If nothing else, consider how a college that receives so many applications from top-notch students would even award merit scholarships when everyone is so obviously qualified?
So, as acceptance rates decrease, the cost of a college increases.
However, colleges that don’t have the same flow of applications from qualified students have to offer financial incentives for them to attend.
Among the 81 colleges that accept less than 40% of students, only 2 provide 90% or more of freshman with institutional aid.
And a large number of these 81 schools give institutional aid to less than 50% of freshman; but the vast majority of that money is actually need-based aid, NOT merit aid.
Bottom line: If you want to pay less for college, you need to start shopping for schools that have less demand, where you may not recognize the name, and where they have higher acceptance rates – which are all not such bad things!
The Value of Rankings and Paying for College
What makes 50 or fewer colleges so much more attractive than the remaining 1500?
Can you say “US News Best College Rankings?”
For those who want the short version, the problem with rankings is deciding what to rank.
In the case of US News, popularity is a major factor in their rankings; though in their language it’s called “reputation” and it accounts for over 20% of the rankings.
For the purposes of the rankings, “reputation” is measured by a survey of college officials who US News believes are objective about the ranking process.
In fact, US News explicitly states that “reputation” shouldn’t be based on measurable criteria. Hmmm… so a lot of this is just opinion?
What does this mean for families who want to pay less for college?
If you believe that rankings are an indicator of popularity, then more students with better qualifications will be applying to these schools.
Combining this with our higher education supply and demand theory, as more students apply, acceptance rates decline and college prices increase.
The question is “Does a higher ranked school deliver a better education that justifies a higher price?”
Some would argue that a higher priced college does deliver more value and a better return on your investment.
But that’s hard to conclude because it’s difficult to account for the different qualifications of students that by the nature of the higher rankings they attract.
And colleges aren’t forthcoming in supplying information on salaries and graduate school acceptance rates.
Bottom line: If you can’t prove a higher ranked college is worth the cost, why not consider a lower ranked school that gives you a better deal?
Geography Matters if You’re Trying to Pay Less for College
As anyone who has purchased real estate knows, a big factor that drives price is: location, location, location.
The same thing goes for college prices. How much you pay for college can depend on location.
The fact is, for whatever reasons, high school students prefer to attend colleges on the west coast and northeast, especially schools that offer a “big city” experience.
Since colleges are well aware of this, they adjust their prices accordingly.
When you look at the average net price for private colleges by region, the most expensive region is New England, followed by the Far West and then the Mid East.
Bottom line: Because of the differences in demand caused by geography, students can find schools outside of the west coast and northeast that offer similar quality but more generous merit aid.
Avoid “Goldilocks Colleges if You’re Worried About Paying for College
There are some pretty common stereotypes about college size, both good and bad.
“Small colleges provide personal attention but you’ll be limited in opportunities and everyone will know your business.”
“Large colleges and universities provide plenty of academic opportunities, a diverse student population along with name recognition, and career networking opportunities but it’s easy for students to get lost in the system.”
Maybe because of these perceptions, high school students seem to prefer “Goldilocks colleges” – not too big, not too small, but just right.
While there’s not official definition, we put Goldilocks size at more than 5,000 but less then 10,000 students.
The problem with the Goldilocks preference is that it eliminates a vast majority of schools from consideration.
Approximately three-quarters of all four-year colleges have less than 5,000 undergraduates.
Also, Goldilocks schools with a 50% or better graduation rate have the highest average net price among schools with similar graduation rates but of different sizes.*
By comparison, colleges with 5,000 or fewer undergraduates and 50% or better graduation rate, had the lowest average net price.*
They also had the highest percentage of freshman receiving institutional grants.
Bottom line: If you’re looking to pay less for college, it’s all about the numbers: size of undergraduate population, graduation rates, and net average price, to name a few.
*Based on IPEDS data
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