Antitrust Law Will Not Limit College Costs

Once again, the U.S. Department of Justice has decided that colleges and universities are not exempt from antitrust law. This line of thinking, consistent among three U.S. presidential administrations, has also consistently missed the mark.

As we follow this long and winding path, we find that the latest misguided lawsuit was filed by former students of several selective universities (Duke, Northwestern and Vanderbilt Universities) who claim in a class action that their alma maters and 13 other universities illegally collaborated in setting financial aid awards. These universities are or were members of the 568 Presidents Group. The plaintiffs argue that while these institutions claim to have been allowed to work together (under the section 568 exemption to the antitrust laws in Improving America's Schools Act), the institutions did not meet the criteria for the exemption.

To be entitled to the exemption, schools must be need-blind in the admissions process, and the plaintiffs argue that nine of the 16 did not meet the need-blind criteria, and the other seven, in conspiring with these nine, were also in violation. Although adhering to a consensus methodology for awarding need-based aid--allowed under the exemption--they have been accused of limiting financial aid awards illegally, thereby harming students and families who paid the bills. The plaintiffs claim that the net prices paid were higher than they would have been absent the consensus methodology, and that reimbursement and damages are due.

The Aim of Consensus Methodology

Every member of the 568 Presidents Group attests that it is need-blind on an annual basis. These institutions believe they meet the conditions of section 568. In contrast to "need-aware" schools, which reject otherwise admissible and desirable students based on their need for institutional financial aid, these institutions commit to not taking a student's need for financial aid into account in the admissions process. They view this as contributing to the public good by supporting educational attainment and economic mobility, in accord with their missions as non-profit institutions. By working on a consensus methodology, they hoped to prevent institutions from competing for high-income students with more financial aid than needed, at the expense of financial aid for low- and middle-income families who couldn't afford to attend without it.

The purpose of consensus methodology is to calculate what families would need in financial aid to make it financially possible for their student to attend. The institution would then, if it had the resources, offer a financial aid package, including grants, loans, and work expectations, that would meet this need. The idea is that this would keep schools from competing for higher-paying students through unneeded financial aid awards. Given what schools are spending on financial aid, the students that universities wanted to avoid competing for through net price are higher-income students, not low- and middle-income students as claimed in the suit.

Preventing the Zero-Sum Scenario

Many colleges that are not members of the 568 Presidents Group because they are need-aware have argued for extending the exemption to them so that they can reduce their expenditures on merit aid, or financial aid to students above and beyond what they need to attend. They feel forced to offer merit aid, to compete for many of the students they would like to enroll, and often lose to other institutions if they don't offer it.

Students and their families care about the net price they are asked to pay, but they also care about the programs offered by the colleges and universities. Colleges compete for students by offering the programs that the talented and wealthier students in their applicant pools desire. This can range from spending money on the academic mission of the institution, such as hiring talented faculty and reducing the size of classes, but also on amenities such as great food and dormitories. At selective colleges, there is an arms race to attract wealthy students by spending on the programs that attract them. And this arms race has worsened as income inequality has increased in America over the last 50 years.

This disadvantages lower- and middle-income students, because these higher-income students are willing and able to pay for these programs and amenities. If one school chooses not to invest in them, the students can go elsewhere. The spending on these programs are resources that could be used for need-based financial aid. And, if schools could cooperate on restraining spending on wealthy students, lower- and middle-income students could benefit from greater need-based financial aid.

It is true that some students will be disadvantaged if colleges can cooperate to protect resources for lower- and middle-income students. Those would be the higher-income students that have benefited from colleges competing for them, both because they arrive having had significant resources invested in their K-12 education, making them attractive candidates, but also because they can pay the full sticker price. With fixed resources, the allocation of those resources is a zero-sum game. If spent on programs, those resources can't be spent on financial aid. If spent on merit aid for high-income students, colleges can't further reduce the price for low- and middle-income students. The antitrust laws are not helpful in improving the welfare of all consumers of higher education.

Aligning Federal Antitrust Laws With Financial Aid Policies

Federal financial aid policies reinforce the benefits of making higher education available to students, regardless of family income. Through federal grant and loan programs, particularly targeted at low- and middle-income students, as well as a variety of special tax provisions, all institutions of higher education receive subsidies and can be expected to contribute to the public good, including by educating students from all backgrounds and supporting economic opportunity and social mobility, in exchange for these subsidies.

Many selective colleges and universities are doing better by low- and middle-income students than they were in the past. Their shares of Pell Grant recipients are up and the net price they are asking them to pay is down. For the 16 universities listed in the suit, between 2008-9 and 2019-20, their average share of Pell Grant recipients increased by 4.5 percentage points. And the net prices for four income categories reported to IPEDS (0-30,000, 30,001-48,000, 48,001-75,000, and 75,001-110,000) decreased by between almost $4,500 and $9,000. This set of 16 universities on average increased their shares of low- and middle-income students more (as measured by Pell shares) and asked them to pay lower net prices than the averages for a set of colleges and universities with the highest endowments in the country.

At the same time, these selective institutions are wealthier than ever, and could be doing more to increase the socioeconomic diversity of their students. Yet contrary to the plaintiffs who are arguing that these colleges are not entitled to cooperate, allowing even greater cooperation among these institutions--as well as those that are currently need-aware--would further benefit low- and middle-income students. Federal antitrust laws and federal financial aid policies are working at cross purposes. Allowing greater exemptions under the antitrust laws would bring these two sets of federal policies into alignment and support the goal of increasing educational attainment and supporting equal opportunity. Access to the exemption could be contingent on actually demonstrating success in recruiting and educating more low- and middle-income students, directly supporting the goals of federal policy.