Quality And Price Are Positively, Linearly Related

I have an ex-wife who implicitly believes this assumption.  Despite being brainy, she seeks out the most expensive products in every product category.  If the expensive product goes on sale, then she reasons that that is clear evidence that there is “something wrong with it.” “Don’t buy it, it’s on sale” became a shopping mantra in our household.

As the father of kids who have gone through college I’m keenly interested in the effect of price (room, board, tuition and fees) on school choice when the conventional wisdom is that the more you pay the better the school.   Who doesn’t want to send their son or daughter to a top school?

In fact, if you do some analysis you’ll quickly discover that with respect to higher education, price and quality are inversely related.   The higher the quality the less you pay. “Whoa,” you ask, “how do you explain that?   That makes no sense at all.”

Let’s begin with the observation that students today can get a great deal at large public institutions.  The Universities of California-Berkeley, Michigan, Penn State and Wisconsin, for example, are world class institutions.  Their advertised price is half that of top private colleges and universities for in-state residents and yet the quality of the education is comparable.
True, class sizes at state schools are larger and the contacts you make may be less valuable, but those effects can be neutralized through shrewd class selection and club/Greek memberships.

It’s also true that for out-of-staters it’s difficult to get into the top public universities and easier perhaps to enter a premier private institution, premier at least in terms of its price.  In the East, consider Boston College, Boston University, Georgetown, Syracuse and Tufts.  Their average tuition, room, board and fees are greater than $58k a year, for an education which, in our estimate, is about 80% as good as the top state schools at $38k a year.  

But here’s the most interesting point.  Tuition and expenses at the best schools, take for example the Ivies, (Harvard, Yale, Princeton, Dartmouth, The University of Pennsylvania, Columbia, Cornell, and Brown—ranked in terms of their excellence) are heavily discounted. The average student pays half the advertised price. At Yale, where current total expenses are $58,600 (tuition, room, board, books, fees and personal expenses) families with total incomes of less than $65,000 pay nothing. And with a $19.2 billion endowment the estimated average scholarship per student is $37,500.  

Harvard’s total one year expenses are a little less, coming in at $57,950 and their endowment is $32 billion. Their website boasts “A typical student may receive over $150,000 in Harvard scholarship assistance over four years and the majority of students receiving scholarship are able to graduate debt-free.”

What this means is that many students going to third rate colleges and universities are paying more than many students at Harvard and Yale.  This disadvantage is compounded when you consider the ROI of a college degree which is far greater for higher quality institutions than lesser quality institutions.

If you plot the relationship between quality and advertised price, the relationship is fairly linear. The higher the level of academic quality, the higher the advertised price.   But if you plot the relationship between quality and actual price the relationship is clearly negative. You can get more for less if you study hard, do well in AP classes and prep for the SATs. 

Generally speaking, we should add, quality and price are positively related but not always.  Cosmetics, household paint, lawn care services software and video games are all examples where the two variables are unrelated or, as in the college case, inversely related.