Politicians buy votes by bribing constituents with cheap goods (degrees), laundered through the state university. Out of state students are not the children of their constituents. How is this complicated?
I don't think Brian is entirely wrong, but I do believe there's an element of price discrimination/market segmentation here. Airlines charge more for flights close-in because people value travel for business, funerals, family emergencies and such more than elective leisure travel. Out-of-state students probably value their specific choice of school significantly more than in-state students. After all, they are willing to go out of state or even country to get it. They really want a specific name (or narrow band of names) on that degree, maybe for status or maybe because dad and granddad went there or maybe they just love the sports team. In-state students are more likely to go because college is the next step and X State U is the first place that comes to mind when you live in state X.
Why either/or? Why conclude that the out-of-state price is the actual cost?
I've always assumed an element of cross-subsidizing; that the actual cost of tuition is lower than the out-of-staters pay and substantially higher than in-state tuition. So I disagree that the state is picking up 2/3 of the cost for in-staters. Instead, I'd guess the state picks up a chunk of the cost and out-of-staters are picking up some of the tab for others as well.
If you want to complicate things, the financial picture gets more complex and ugly, with merit students and desired minorities from out of state also getting subsidies. By contrast, whites and undesired minorities from out of state are more likely to have to subsidize in-staters and desirable out-of-staters. And given the near-lockstep discrimination colleges engage in on this issue, wrong color out-of-state applicants are likely to face similar price and racial discrimination from most or all the similar-rated colleges they apply to.
Public universities are not really incentivized to make a profit. They are more incentivized to make the voters happy. Their total enrollment due to size of institution is the limiting factor more than their revenue, and that's somewhat fixed for various reasons. What makes the voters in a state happy is providing a large amount of high-status education inexpensively.
You can't just ban out-of-state students because that would reflect poorly on the quality of your students. So the optimal strategy is to take a bunch of in-state students for cheap, and then a small number of out-of-state students to maintain the high status of your institution.
I think some international perspective would be helpful in this analysis:
* As others have pointed out: In Canada, most provinces (except Québec, although they charge Québec tuition rates to students from France!) charge the same tuition to all Canadians. But charge an arm and a leg to international students. I highly doubt international students are paying just the actual cost. They must be also subsidizing Canadian students with their insanely-high tuition fees.
* Singapore has this bond system where international students (mainly from Malaysia or the so-called "People's Republic of" China) pay the same rates as Singaporean students (exceptional students get a free ride!), in exchange for working in Singapore or for a Singaporean company for so many years after they graduate. Otherwise, they have to repay the difference. I wonder how they can collect on the debt in other countries though. Perhaps they have agreements with those countries.
* Some European countries charge the same, low tuition to EVERYBODY (even foreigners!) but perhaps you may have to learn their language for some programs, hwhich might be a barrier to entry.
As for my theories on what are the reasons:
2. Subsidies. Like you said. In Canada and the US, education is not supposed to be a federal responsibility. But, of course, the federal government has ways of twisting state/provinces arms by providing grants with strings attached. In Canada, the federal government largely butts out of K-12 education but there is the Canada Social Transfer which provides funding for post-secondary education among other things. I'm not sure hwhat, if any, strings come attached to the Canada Social Transfer, but perhaps it could simply be the ghost of past policies. Perhaps the federal government used to insist that provinces charge the same tuition for all Canadians and Canadians just got used to that.
2. Tuition caps. In Canada, many provinces legally enforce tuition caps on universities for Canadian students. They can't charge more than X amount. The rest has to come from subsidies, research grants, international students, etc. Or the universities just lower their quality. Many of my professors were terrible. Some could barely speak English. But that still doesn't answer the question: hWhy not only cap tuition for residents of your province?
3. The hope that you'll stay and pay taxes there: I think, perhaps, in Canada, the populations and economies of the provinces are quite unequal:
* Ontario, Alberta and BC have relatively large populations and are economic powerhouses, so they're quite confident that, if you study there, you'll get a job, stay there and, most importantly, pay taxes there.
* Manitoba, Nova Scotia and New Brunswick are probably just desperate and they'll try anything to get you to give them a try and, maybe, just maybe stay? Pretty please!
* NewFoundLand, PEI and Saskatchewan probably don't get many out-of-province students so this is prolly just not a big issue for them.
* Québec DOES charge different out-of-province tuition rates. And I think they only want you to stay if you speak French.
So why do US states charge out-of-state tuition rates?
* Maybe cause there's more likely to be interstate mobility amongst college grads, especially amongst college students who already are willing to study out-of-state? For example, if someone is willing to leave Georgia to study in Massachussetts, they're prolly also willing to leave Mass to work in NY or Cali.
* If someone studies in their home state, they prolly more likely to wanna be close to their parents after they graduate, too.
But, wait! Wouldn't Canadians who left their home province to study in one of the powerhouse provinces be willing to work in another powerhouse province? Maybe.
* But Ontario is far from the other two powerhouse provinces (Alberta and BC) so that helps!
* Alberta and BC are neighbours but are quite different! Alberta is an economic powerhouse but doesn't have that many famous schools. So, someone hwho choose to study in Alberta might be looking to work in Alberta, like the oil and gas industry. There's not much of an oil and gas industry in BC. Students who study in BC would likely not wanna live in Alberta after they graduate, due to cultural (picture Cali vs Texas!) and climate differences! But hwhat about NS and NB? They've got some decent schools like St. FX and Mount A. Wouldn't St. FX or Mount A grads move to other provinces for work? Prolly. My dad did. But NS and NB are desperate enough to try anything, even though subsidizing out-of-province students is a money-hole for them, they're gonna keep hoping and trying and trying and hoping. My dad still got mailings from the government of NB years later, begging him to come back! I guess they got his address from the Mount A alum association?
So, there you go: In summary, in Canada, most post-secondary students pay the same regardless of what province they study in. I think its mainly cause the government of the province they study in is hoping they'll stay work and pay taxes there after graduation. In Ontario, BC or Alberta, grads probably will. Due to various logistical factors. In NB or NS, grads will likely end up living, working and paying taxes in Ontario, BC or Alberta. But they're so desperate, they're gonna try, anyway! Québec only wants you if you speak French and they DO charge differential tuition for out-of-province students. MB, PEI, SK and NL don't have many good schools, so probably not as many out-of-province students so this is just not a salient issue.
I think in the US, states are more similar, so more at risk of post-grad interstate mobility.
Wait, it's the opposite that would be weird! The state wants to subsidize school for it's citizens. It makes sense to setup state schools to do this only if it costs less than just giving the students the money to go to an out of state school.
Essentially, the state schools are wholly owned subsidiaries who can make a profit by accepting out of state students. The state then spends that money plus some direct payments to subsidize in state tuition.
Asking why the state school doesn't just charge everyone out of state tuition (the market rate) is like asking why a company pays a dividend or buys back stock rather than keeping it.
The market price is different for different states and different state schools within the state. An interesting case is Texas, which charges substantially the same in-state tuition for each of its 4-year universities. However, they guarantee admission to the top 10% of each recognized public or private high school class. This is irrespective of the quality of the high school, and the school quality varies widely. However, everybody wants to go to UT, because it has the best reputation, so UT ran out of capacity, despite its size. So, they dropped the 10% rule to the top 6% only for UT Austin. It nearly runs out of capacity - if a kid is not in the top 6%, it is very difficult to get into UT. A&M has limited capacity as well at the 10% cutoff. Yet, public schools in neighboring states actively recruit students from competitive high schools that don't make the top 6% or 10%. So, the price for admission is the GPA, and parents at competitive high schools spend big $ on tutors and consultants. My son goes to a very large public high school, and if he doesn't have a 95 average while maximizing honors/AP classes (7 out of 8 classes), he's probably not going to UT. He's an elite athlete, so he has an alternative route, though the athletic/extracurricular competition at his school is just as intense.
Of course, it is also well known that the published list price of private and out-of-state public schools is much like the published list price of medical procedures. Nobody knows how much anybody actually pays, and it varies widely from student to student. The published out-of-state tuition at UT is about $40k, versus $11.6 for in-state, according to Mr. Google (not including R&B). It's $50k at UVA for out-of-state vs $20k for in-state. So, if the $26k/6k quoted here is accurate, that suggests a wide spread between the top state schools and everyone else.
The subsidy quoted in this article (about 25-30% of the in-state tuition rate) is probably calculated versus the cost to provide services, and frankly I'm not sure the state knows how much it really spends on student education. I'd say the accounting is likely creative, but that's ascribing a generous level of competence to the state bureaucracy, much less a motive to be accurate.
You may be missing one element- the taxes paid by in state’ students’ PARENTS the 18 years prior to the student arriving on campus. All state owned schools receive some funding from the state. Parents of in state students have contributed, through taxes paid while the kids are growing up. Their taxes are part of the means to ensure the university will be there when their kids reach that stage - sort of a hedge for possible future use. They most likely continue to pay taxes while the kids are enrolled in college. Is that not worth some consideration in price?
Isn't it much simpler? There is enough demand to charge the out of state rate in a competitive market. So why the discount for in-state students? Because the legislature has (at least implicitly) conditioned continuing subsidies on that discount and those subsidies are worth more than the loss of tuition
Is there something going on with signalling complicating the analysis though? The way prestigious colleges make money is to take mediocre full price students and launder their talent by mixing them in with a bunch of smarty pants who get massive subsidies. Do smart in-state college administrators align their subsidies to capture talented students from the state, then auction off the privilege to be mixed in with them to rich folks from out-of-state and overseas? They appease the politicians by appearing
to offer great value to voters. Obviously it's more complicated, but a significant portion of the gap could be an illustration of the degree to which rich parents of mediocre students subsidize talented students willing to trade cash for institutional prestige.
For Canadian universities, out of province tuition is typically 5 times in province tuition and is typically $40,000 or more US per year for the better schools such as UBC, UT, etc.
This is more than US tuition for them but in Canada this implicity provides a near automatic pathway to landed immigrant status (the Canadian equivalent of the US green card.
Australia and New Zealand have similar student to citizen pipelines which also support major pillars of their economies...
From an economic perspective, the US is losing this part of this race, even though their best schools are better and US citizenship is typically more highly valued...
I can't help but think a reason for the higher prices is that the competition is really bad. That is to say, the leaders of the university are not chosen based on competency on how well they can drive profitability of the college, but as much as how well they can raise money via donations and conform with the politically viable orthodoxy. As such there really isn't much thought and clever application of attention to come up with ways to get more students from out of state, but possibly more of a "what can we get away with, especially if we collude a little with our competitors".
At the same time, we need to keep in mind that very few people pay list price due to the massive amount of price discrimination going on, and it may well be that out of state students have a higher willingness and ability to pay on average. So even if out of staters are paying more as a group, they might well be doing some sort of cross subsidizing for other local students who are the real target market. Plus, as you point out, it politically looks bad if a school gets lots of state level funds and enrolls a large proportion of out of state students, so there is probably a balancing game there of trying to maximize revenue from out of state kids while keeping their levels down to politically acceptable levels. No public school is going to risk being cut off from the public teat (if that is even a possibility) because they have too many out of state students.
Tho I did the math for IU Bloomington and if the 22k kids who pay in state tuition paid out of state it's a bit more than double (600 millionish) what this year's state budget item is for the school. Half seems fair if you include the special items every few years like bee buildings.
But higher price reduces demand so you likely can't get 22k students with the same level of ability to pay the out of state tuition (and worse students reduce long term brand). Also fewer/worse students lowers alumni donations as well.
So it's not really off all that far. Same order of magnitude.
The topic is certainly an interesting one, though I don't think it's as puzzling as you make out. Yes, "out-of-state tuition as the roughly competitive price" -- at the University of Oregon (where I am), it is quite apparent that out of state students subsidize the in-state students, and I think this is very common. And yes, "you’d expect each state to try to “steal” as many as possible from competing states", but this isn't as easy to do as you'd think, and cost is only one of several factors at play.
Similar case in the UK where universities treat kids completely arbitrarily making offers as residents (9k tuition fee) or as foreigner (27k) without a clear criteria. I have two kids studying there and one pays the first fee, the second one the second fee. It is completely discretionary and driven by budget considerations. I am not saying you can buy your admission but there is an element of that if you are from China for example (then professors need to be careful in what they say….but that is a separate story).
Politicians buy votes by bribing constituents with cheap goods (degrees), laundered through the state university. Out of state students are not the children of their constituents. How is this complicated?
I don't think Brian is entirely wrong, but I do believe there's an element of price discrimination/market segmentation here. Airlines charge more for flights close-in because people value travel for business, funerals, family emergencies and such more than elective leisure travel. Out-of-state students probably value their specific choice of school significantly more than in-state students. After all, they are willing to go out of state or even country to get it. They really want a specific name (or narrow band of names) on that degree, maybe for status or maybe because dad and granddad went there or maybe they just love the sports team. In-state students are more likely to go because college is the next step and X State U is the first place that comes to mind when you live in state X.
Why either/or? Why conclude that the out-of-state price is the actual cost?
I've always assumed an element of cross-subsidizing; that the actual cost of tuition is lower than the out-of-staters pay and substantially higher than in-state tuition. So I disagree that the state is picking up 2/3 of the cost for in-staters. Instead, I'd guess the state picks up a chunk of the cost and out-of-staters are picking up some of the tab for others as well.
If you want to complicate things, the financial picture gets more complex and ugly, with merit students and desired minorities from out of state also getting subsidies. By contrast, whites and undesired minorities from out of state are more likely to have to subsidize in-staters and desirable out-of-staters. And given the near-lockstep discrimination colleges engage in on this issue, wrong color out-of-state applicants are likely to face similar price and racial discrimination from most or all the similar-rated colleges they apply to.
Public universities are not really incentivized to make a profit. They are more incentivized to make the voters happy. Their total enrollment due to size of institution is the limiting factor more than their revenue, and that's somewhat fixed for various reasons. What makes the voters in a state happy is providing a large amount of high-status education inexpensively.
You can't just ban out-of-state students because that would reflect poorly on the quality of your students. So the optimal strategy is to take a bunch of in-state students for cheap, and then a small number of out-of-state students to maintain the high status of your institution.
There are some state universities that no longer charge out-of-state tuition, even outside of reciprocity agreements. https://www.mackinac.org/blog/2022/some-state-schools-drop-out-of-state-tuition
I think some international perspective would be helpful in this analysis:
* As others have pointed out: In Canada, most provinces (except Québec, although they charge Québec tuition rates to students from France!) charge the same tuition to all Canadians. But charge an arm and a leg to international students. I highly doubt international students are paying just the actual cost. They must be also subsidizing Canadian students with their insanely-high tuition fees.
* Singapore has this bond system where international students (mainly from Malaysia or the so-called "People's Republic of" China) pay the same rates as Singaporean students (exceptional students get a free ride!), in exchange for working in Singapore or for a Singaporean company for so many years after they graduate. Otherwise, they have to repay the difference. I wonder how they can collect on the debt in other countries though. Perhaps they have agreements with those countries.
* Some European countries charge the same, low tuition to EVERYBODY (even foreigners!) but perhaps you may have to learn their language for some programs, hwhich might be a barrier to entry.
As for my theories on what are the reasons:
2. Subsidies. Like you said. In Canada and the US, education is not supposed to be a federal responsibility. But, of course, the federal government has ways of twisting state/provinces arms by providing grants with strings attached. In Canada, the federal government largely butts out of K-12 education but there is the Canada Social Transfer which provides funding for post-secondary education among other things. I'm not sure hwhat, if any, strings come attached to the Canada Social Transfer, but perhaps it could simply be the ghost of past policies. Perhaps the federal government used to insist that provinces charge the same tuition for all Canadians and Canadians just got used to that.
2. Tuition caps. In Canada, many provinces legally enforce tuition caps on universities for Canadian students. They can't charge more than X amount. The rest has to come from subsidies, research grants, international students, etc. Or the universities just lower their quality. Many of my professors were terrible. Some could barely speak English. But that still doesn't answer the question: hWhy not only cap tuition for residents of your province?
3. The hope that you'll stay and pay taxes there: I think, perhaps, in Canada, the populations and economies of the provinces are quite unequal:
* Ontario, Alberta and BC have relatively large populations and are economic powerhouses, so they're quite confident that, if you study there, you'll get a job, stay there and, most importantly, pay taxes there.
* Manitoba, Nova Scotia and New Brunswick are probably just desperate and they'll try anything to get you to give them a try and, maybe, just maybe stay? Pretty please!
* NewFoundLand, PEI and Saskatchewan probably don't get many out-of-province students so this is prolly just not a big issue for them.
* Québec DOES charge different out-of-province tuition rates. And I think they only want you to stay if you speak French.
So why do US states charge out-of-state tuition rates?
* Maybe cause there's more likely to be interstate mobility amongst college grads, especially amongst college students who already are willing to study out-of-state? For example, if someone is willing to leave Georgia to study in Massachussetts, they're prolly also willing to leave Mass to work in NY or Cali.
* If someone studies in their home state, they prolly more likely to wanna be close to their parents after they graduate, too.
But, wait! Wouldn't Canadians who left their home province to study in one of the powerhouse provinces be willing to work in another powerhouse province? Maybe.
* But Ontario is far from the other two powerhouse provinces (Alberta and BC) so that helps!
* Alberta and BC are neighbours but are quite different! Alberta is an economic powerhouse but doesn't have that many famous schools. So, someone hwho choose to study in Alberta might be looking to work in Alberta, like the oil and gas industry. There's not much of an oil and gas industry in BC. Students who study in BC would likely not wanna live in Alberta after they graduate, due to cultural (picture Cali vs Texas!) and climate differences! But hwhat about NS and NB? They've got some decent schools like St. FX and Mount A. Wouldn't St. FX or Mount A grads move to other provinces for work? Prolly. My dad did. But NS and NB are desperate enough to try anything, even though subsidizing out-of-province students is a money-hole for them, they're gonna keep hoping and trying and trying and hoping. My dad still got mailings from the government of NB years later, begging him to come back! I guess they got his address from the Mount A alum association?
So, there you go: In summary, in Canada, most post-secondary students pay the same regardless of what province they study in. I think its mainly cause the government of the province they study in is hoping they'll stay work and pay taxes there after graduation. In Ontario, BC or Alberta, grads probably will. Due to various logistical factors. In NB or NS, grads will likely end up living, working and paying taxes in Ontario, BC or Alberta. But they're so desperate, they're gonna try, anyway! Québec only wants you if you speak French and they DO charge differential tuition for out-of-province students. MB, PEI, SK and NL don't have many good schools, so probably not as many out-of-province students so this is just not a salient issue.
I think in the US, states are more similar, so more at risk of post-grad interstate mobility.
Wait, it's the opposite that would be weird! The state wants to subsidize school for it's citizens. It makes sense to setup state schools to do this only if it costs less than just giving the students the money to go to an out of state school.
Essentially, the state schools are wholly owned subsidiaries who can make a profit by accepting out of state students. The state then spends that money plus some direct payments to subsidize in state tuition.
Asking why the state school doesn't just charge everyone out of state tuition (the market rate) is like asking why a company pays a dividend or buys back stock rather than keeping it.
The market price is different for different states and different state schools within the state. An interesting case is Texas, which charges substantially the same in-state tuition for each of its 4-year universities. However, they guarantee admission to the top 10% of each recognized public or private high school class. This is irrespective of the quality of the high school, and the school quality varies widely. However, everybody wants to go to UT, because it has the best reputation, so UT ran out of capacity, despite its size. So, they dropped the 10% rule to the top 6% only for UT Austin. It nearly runs out of capacity - if a kid is not in the top 6%, it is very difficult to get into UT. A&M has limited capacity as well at the 10% cutoff. Yet, public schools in neighboring states actively recruit students from competitive high schools that don't make the top 6% or 10%. So, the price for admission is the GPA, and parents at competitive high schools spend big $ on tutors and consultants. My son goes to a very large public high school, and if he doesn't have a 95 average while maximizing honors/AP classes (7 out of 8 classes), he's probably not going to UT. He's an elite athlete, so he has an alternative route, though the athletic/extracurricular competition at his school is just as intense.
Of course, it is also well known that the published list price of private and out-of-state public schools is much like the published list price of medical procedures. Nobody knows how much anybody actually pays, and it varies widely from student to student. The published out-of-state tuition at UT is about $40k, versus $11.6 for in-state, according to Mr. Google (not including R&B). It's $50k at UVA for out-of-state vs $20k for in-state. So, if the $26k/6k quoted here is accurate, that suggests a wide spread between the top state schools and everyone else.
The subsidy quoted in this article (about 25-30% of the in-state tuition rate) is probably calculated versus the cost to provide services, and frankly I'm not sure the state knows how much it really spends on student education. I'd say the accounting is likely creative, but that's ascribing a generous level of competence to the state bureaucracy, much less a motive to be accurate.
You may be missing one element- the taxes paid by in state’ students’ PARENTS the 18 years prior to the student arriving on campus. All state owned schools receive some funding from the state. Parents of in state students have contributed, through taxes paid while the kids are growing up. Their taxes are part of the means to ensure the university will be there when their kids reach that stage - sort of a hedge for possible future use. They most likely continue to pay taxes while the kids are enrolled in college. Is that not worth some consideration in price?
Isn't it much simpler? There is enough demand to charge the out of state rate in a competitive market. So why the discount for in-state students? Because the legislature has (at least implicitly) conditioned continuing subsidies on that discount and those subsidies are worth more than the loss of tuition
Is there something going on with signalling complicating the analysis though? The way prestigious colleges make money is to take mediocre full price students and launder their talent by mixing them in with a bunch of smarty pants who get massive subsidies. Do smart in-state college administrators align their subsidies to capture talented students from the state, then auction off the privilege to be mixed in with them to rich folks from out-of-state and overseas? They appease the politicians by appearing
to offer great value to voters. Obviously it's more complicated, but a significant portion of the gap could be an illustration of the degree to which rich parents of mediocre students subsidize talented students willing to trade cash for institutional prestige.
For Canadian universities, out of province tuition is typically 5 times in province tuition and is typically $40,000 or more US per year for the better schools such as UBC, UT, etc.
This is more than US tuition for them but in Canada this implicity provides a near automatic pathway to landed immigrant status (the Canadian equivalent of the US green card.
Australia and New Zealand have similar student to citizen pipelines which also support major pillars of their economies...
From an economic perspective, the US is losing this part of this race, even though their best schools are better and US citizenship is typically more highly valued...
I can't help but think a reason for the higher prices is that the competition is really bad. That is to say, the leaders of the university are not chosen based on competency on how well they can drive profitability of the college, but as much as how well they can raise money via donations and conform with the politically viable orthodoxy. As such there really isn't much thought and clever application of attention to come up with ways to get more students from out of state, but possibly more of a "what can we get away with, especially if we collude a little with our competitors".
At the same time, we need to keep in mind that very few people pay list price due to the massive amount of price discrimination going on, and it may well be that out of state students have a higher willingness and ability to pay on average. So even if out of staters are paying more as a group, they might well be doing some sort of cross subsidizing for other local students who are the real target market. Plus, as you point out, it politically looks bad if a school gets lots of state level funds and enrolls a large proportion of out of state students, so there is probably a balancing game there of trying to maximize revenue from out of state kids while keeping their levels down to politically acceptable levels. No public school is going to risk being cut off from the public teat (if that is even a possibility) because they have too many out of state students.
Tho I did the math for IU Bloomington and if the 22k kids who pay in state tuition paid out of state it's a bit more than double (600 millionish) what this year's state budget item is for the school. Half seems fair if you include the special items every few years like bee buildings.
But higher price reduces demand so you likely can't get 22k students with the same level of ability to pay the out of state tuition (and worse students reduce long term brand). Also fewer/worse students lowers alumni donations as well.
So it's not really off all that far. Same order of magnitude.
The topic is certainly an interesting one, though I don't think it's as puzzling as you make out. Yes, "out-of-state tuition as the roughly competitive price" -- at the University of Oregon (where I am), it is quite apparent that out of state students subsidize the in-state students, and I think this is very common. And yes, "you’d expect each state to try to “steal” as many as possible from competing states", but this isn't as easy to do as you'd think, and cost is only one of several factors at play.
A few years ago, I made some graphs on the topic, including "Is out-of-state fraction correlated with state support?" here: https://eighteenthelephant.com/2021/06/27/graphs-about-out-of-state-college-students-and-money/
Similar case in the UK where universities treat kids completely arbitrarily making offers as residents (9k tuition fee) or as foreigner (27k) without a clear criteria. I have two kids studying there and one pays the first fee, the second one the second fee. It is completely discretionary and driven by budget considerations. I am not saying you can buy your admission but there is an element of that if you are from China for example (then professors need to be careful in what they say….but that is a separate story).