Financial Aid = HC Profits?
Published: Friday, February 15, 2013
Updated: Sunday, February 17, 2013 17:02
Financial aid has long been established as a government subsidy (the opposite of a tax, the government gives you money rather than taking it away) to promote the education of our citizenship. While that is certainly true, there is a way that colleges benefit from financial aid and use it as a form of price discrimination to maximize their total profits. Holy Cross, like many colleges, is a non-profit institution; that does not mean that they do not try to maximize profits where they can to keep the school running.
Now before we jump right into all that technical mumbo jumbo, let’s look at the current situation. Price discrimination is a practice of selling a product to each person at the price he is willing to pay. You can see this all around you—movie theaters sell tickets at different prices, as do restaurants and museums; those are all forms of price discrimination. Let’s say I am selling cookies and I have three people: one is willing to pay $2.00, the other is willing to pay $1.50, and the last is willing to pay $1.00. You might think that to maximize my profit I would want to set a price somewhere in the middle, however that is not the case.
If I set the price at $1.50, I make $3.50, which is more than I would make if I sold it to the one person willing to pay $2.00. However, let’s say I use perfect price discrimination and sell cookies to anyone at the exact maximum price they are willing and able to pay. So, then I get the one person willing to pay $2.00, and the person willing to pay $1.50, and the person willing to pay $1.00. That gives me a profit of $4.50, which is the most I can possibly earn. College financial aid works in the exact same way.
The practice of price discrimination mainly takes effect with monopolies. Holy Cross is not a monopoly when it comes to getting a high quality college education, but in the market for people who rank Holy Cross as their number one school, they are definitely a monopoly. Using price discrimination, Holy Cross can get every student who wants to go there, just like any monopoly operates.
The price of tuition at Holy Cross is a steep $55,130 (courtesy of collegeboard.org). Now, if Holy Cross were to only accept that price how many people do you think would go here? If there was not any financial aid of any kind (whether it be $100 or $10,000), there would be a decrease in the number of students attending, and thus a decrease in the school’s profits. However, if Holy Cross offers financial aid, then they get everyone who can pay $55,000 and $50,000 and $40,000, and $30,000. Basically they get everyone who wants to go to the school for whatever amount they are able to pay which maximizes the school’s profits.
Holy Cross does not do this to maximize their profits. The U.S. Government provides subsidies as an incentive to get a college education. However, Holy Cross does happen to benefit from the financial aid program, because it allows them to accept more students than they could if there was no financial aid.