Tuition Elasticity at the College Level and Its Effect on Differential Tuition Rates

Abstract

Increasing higher education enrollment and decreasing state and national funding has created a fiscal problem for higher education institutions in the United States. Differential tuition charged to a variety of subsets of students is increasingly used to close funding gaps. This research uses demand analysis and elasticities to determine differences between eight colleges at a public university to determine which, if any, should be charging differential tuition. Impacts of potential changes to tuition rates on student access are discussed. Demand equations were created using ordinary least squares for eight colleges, Agriculture, Architecture, Business, Education, Engineering, Geosciences, Liberal Arts, and Sciences, using college applications as the dependent variable and assorted cost and macroeconomic variables as independent variables. A second model was determined using Directed Acyclic Graph theory and used to create a model for to answer policy questions. Own-price elasticities (OPE) calculated from the colleges with significant variables in the policy models ranged from 0.3 to -1.64. Two colleges showed as elastic, OPE with an absolute value of greater than 1, indicating that a decrease in tuition would increase revenue and enrollments. One college was inelastic, OPE with an absolute value of less than 1, indicating that while an increase in tuition would lower enrollment, it would increase revenue. Engineering had a calculated OPE that was positive, indicating the possibility that demand changed at a faster rate than supply. Charging the correct form of differential tuition at a 10% level change to these colleges could result in over $4 million additional revenue from first-year students alone. It is suggested to consider differential tuition plan based on calculated elasticities to generate more revenue. If implemented, a large percentage of the funds should be used to create institution-level, need-based, financial aid for students from low socioeconomic and minority backgrounds. The aid should be in the form of grants to reduce the risk of students graduating with high student debt. [The dissertation citations contained here are published with the permission of ProQuest LLC. Further reproduction is prohibited without permission. Copies of dissertations may be obtained by Telephone [phone]. Web page: http://www.proquest.com/en-US/products/dissertations/individuals.shtml.]