Newly published research suggests that some colleges can raise their four-year graduation rate materially (typically about six percentage points – e.g., from 35 to 41%) simply by changing the way they price their educational services. You don’t have to expand remedial education, alter admissions requirements, or do other expensive and disruptive things. Money matters to students – a great deal.
By way of background, a couple of years ago, three of my favorite economics majors at Ohio University, David Holman, Robert Hammer, and Samuel Kissinger, came to me with a proposition: let’s survey dozens of schools as to how they assess tuition fees, look at the graduation rates at those schools, and see if there is any correlation between the approach used to assess fees and actual graduation rates. It was a big project, and I frankly doubted it would ever be done, completely underestimating the leadership of the indefatigable and irrepressible David Holman, and the work ethic of his two buddies (both of whom have gone on to outstanding postgraduate careers).
Some colleges, such as Wichita State or Michigan State, charge students by the credit hour: a student taking 18 hours of credits pays 50% more than one taking 12 hours. Others, like the University of North Dakota or Ohio University, charge a fixed fee over a near unlimited number of hours (12 to 21 hours at North Dakota). For a student taking 15 credit hours continuously each semester, observed tuition fees were lower at Michigan State, charging by the credit hour, than cross-state rival the University of Michigan (with a fixed fee over a wide range of credit hours), but for students taking 17 hours, the University of Michigan was actually noticeably cheaper – hence kids took higher course loads at the U of M than at MSU. Looking at the sample of 70 public schools examined, the four-year graduation rates averaged only 23% at the schools charging by the credit hour, but was half again higher (35%) at schools that did not adhere to charging strictly by the credit hour.
To be sure, those charging by the credit hour on average were less selective admissions schools than the others. Could the lower four year graduation rates at the schools charging by the credit hour be explainable by other factors? To deal with that, the authors performed some regression analysis that did show, as expected, that more prestigious, richer schools with fewer lower income students had higher graduation rates. But even after controlling for these factors, the four-year graduation rates were almost six percentage points higher at the schools not charging students fees that were proportional to the number of hours taken.
But don’t the same proportion of students eventually graduate anyway at the schools that charge by the credit hour? Not quite, although the number of fifth and even sixth year seniors is vastly greater at the schools on that tuition model. Ohio University, with a fixed tuition over a wide band of hours, has four-year graduation rate of nearly 50%, compared with barely 30% at Grand Valley State; the six year graduation rate, however, differs much more modestly in favor of Ohio (only by about two percentage points).
But the variable tuition model means lots more students linger in college for an extra year of two, reducing the number of valuable college-educated resources in the labor force. Higher four year graduation rates confer advantages on the colleges, since that factor enters into college rankings that often influence college choices. Moreover, the ultimate cost and revenue effects of the relatively fixed tuition model fee appear to not be adverse to the colleges – who can get more “college graduates per square foot” of instructional space by not charging by the credit hour.
The study, "An Investigation in University Tuition Models Across the United States," is available from the Center for College Affordability and Productivity, which will provide printed copies upon request.
Richard Vedder directs the Center for College Affordability and Productivity, teaches at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.
