Stay at the efficient frontier when chasing merit aid
What is chasing merit? Sara Harberson, a college admission celebrity of sorts, wrote about it on her blog last month. Lots of middle- and upper middle-class families, who make too much money to qualify for need-based financial aid, don’t want to pay $70k or $80k per year in tuition. Reasonably, I think!
So, these parents encourage their kids to apply to colleges that (1) give out merit aid and (2) are probably not the most prestigious places these kids could get into. Merit aid is money the college gives a family not because the family needs money, but rather because the kid is smart.
Anecdotally, “chasing merit” is happening more often these days.
Let’s examine three econ 101 principles we can apply to this trend.
Markets clear
Colleges go into the marketplace, brandishing their US News rankings. They ask, “Is this diploma worth $70k to you, orthodontists of Palo Alto? Or you, Westchester biglaw types? Cardiologists of Winnetka?"
If enough orthodontists say, “No, thank you,” the profit-maximizing college thinks, “Oops! We misgauged demand.” The college reduces prices until the orthodontists get interested.
(I’m being flippant about the orthodontists, but only mildly. Colleges want kids whose parents can pay full tuition.)
Empirically, and in inflation-adjusted terms, those downward adjustments seem to be happening. College tuition increases did not keep pace with inflation last year. That’s consistent with more families saying “no thanks” to sticker-price tuition of $70k per year.
The Pareto frontier
The Pareto frontier is the set of solutions that represents the best trade-off between goals.
A can of beans is cheap, but not particularly delicious. Lobster is delicious, but not cheap. Those two options are on the Pareto frontier, as we choose between the conflicting goals of cheap and delicious. To my taste, caviar is not on that Pareto frontier, because it is neither cheap nor delicious. It’s worse than beans and lobster.
Here’s a very simplified admission-relevant example. Let’s imagine a unit for prestige, the fancy. (If only class were that clear-cut!) The fancy is a metric unit, so one thousand fancies are a kilofancy.
College A offers $0 of merit aid and so costs $70k per year. It provides 70 kilofancies per year.
College B offers $10k of merit aid and so costs $60k per year. It provides 60 kilofancies per year.
College C offers $30k of merit aid and so costs $40k per year. It provides 20 kilofancies per year.
College D offers $50k of merit aid and so costs $20k per year. It provides 20 kilofancies per year.
Colleges A, B, and D are good options. The choice depends on how much a given family values prestige and can afford. A rational merit aid-chasing family could pick Colleges B or D.
College C is a ripoff. If you’re going to chase merit aid, don’t pick a college like college C. Make sure the dollars you keep by paying lower tuition make up for what your kid gives up in prestige.
Or at least think about that tradeoff! I don’t mean to boss you around.
How to do that, practically? Let’s talk about it in a one-on-one consultation. You can book on my website.
Indifference curves
Maybe that example with four imaginary colleges seemed suspiciously linear to you. Maybe you don’t trade off prestige and money so neatly, or your kid doesn’t.
An indifference curve shows all the combinations of two things that will make you equally happy. Say, five cantaloupes and two chandeliers make you just as happy as four cantaloupes and six chandeliers.
The slopes and bends in the indifference curves for any two things, including merit aid and college prestige, depend on what you care about and like. You get to draw your indifference curve. Maybe you dislike cantaloupe, or you think college prestige is overrated (same, for both).
Also, I bet you have other goals or preferences that don’t fit into this simplified cost vs. prestige example. Maybe your kid wants to be close to home or a beach. Maybe she wants to major in something unusual or attend a single-sex college.
After you consider other preferences and how your particular family weighs prestige vs. cost, maybe college C is the best choice for your kid after all.
Your family’s preferences should determine what you’re aiming for and how you get there. If you want a little help surveying the options and choosing among conflicting goals, I’d be delighted to work with your family.
You can book a one-on-one consultation or sign up for online courses on academics, extracurriculars, standardized tests, and choosing colleges on my website. I look forward to working with your family!
