The Economics of the Harvard Tuition Announcement

Why did Harvard announce yesterday that its tuition fees, for students whose families earn between $120,000 and $180,000, would be 10% of family income? Frankly, I buy the official story: that those students were getting less than the maximum benefit from Harvard due to financial pressures. And the marginal cost of implementing this policy is only $22 million a year: just 0.06% of the size of the Harvard endowment. It's almost a no-brainer, really.

But Zubin points out there are other possible motivations. One is that lower debt burdens allow students to follow their dreams and work for the government or for non-profits rather than feeling compelled to work for McKinsey or Goldman Sachs. I buy that too. And then there's the whole question of competition for "top students":

"It's a bold move that makes a lot of sense," Jesse Rothstein, an economist at Princeton told me. "A lot of these schools are competing really hard to attract a set of students that are not conventionally poor but are at the lower range of their pools and cost is a big factor for them."
While Harvard is the preeminent school in the country, before the move, if Student A was accepted to Harvard, Princeton, and M.I.T. and the two latter schools were offering better financial aid packages, it was no guarantee that Student A would choose Harvard. But now it's a nearly no-brainer for others like Student A and that means Harvard attracts even more top students.

We've been here before: I simply don't buy this idea that there's a limited pool of "top students" which all top universities want. The most qualified cohort of college applicants every year vastly outnumbers the number of places at Harvard, Princeton, and MIT combined. The admissions officers at all those universities have a large and necessarily somewhat subjective set of criteria which lead them to choose some subset of that cohort for admission. And that subset, which gets admitted, invariably does very well. But any other subset, once admitted, would also do very well.

Harvard is – and should be – defined much more by what happens to students after they're admitted, than it is by the quality of students, however defined, on their first day as a freshman. And I think that might explain another reason for this move. Students from families earning between $120,000 and $180,000 are likely to be quite rich when they grow older, and the fonder their memories of Harvard the more they're likely to donate. It's entirely possible that this whole scheme is a money-maker for Harvard, once you include the extra donations these students, especially the ones who make many millions of dollars, are going to give to the Harvard endowment in decades to come.