There's No Single Interest Rate, and No Single College Tuition

The Federal Reserve does not set interest rates. If it did, the U.S. economy would be desperately depressed and the Fed’s actions not worth talking or writing about.

More realistically, there’s production. Interest rates spring from the latter. No one borrows money, rather people borrow market goods, services, and labor. And since the economics of every borrower is different, so is the interest rate charged every borrower.

College tuition is a market good, and it’s no different. George Will has made the crucial point that if colleges and universities were able to charge their headline tuition number to every matriculate, they’d be swimming in money.

Except that colleges charge a variety of tuitions. It’s all based on the individual economics of the applicant.

That’s among many other things why there are so many “scholarship” students at universities these days. Depending on the economics of each would-be student, they offer scholarships that are really nothing more than reduced tuition.

While it’s no doubt true that Harvard, Princeton, Yale, and Stanford can charge the headline tuition to exponentially more students, and could realistically charge many multiples of their announced tuition numbers if they desired, they plainly do not. Which is just a comment that affirmative action reveals itself in ways beyond race, athletics, or legacy. In a very real sense, affirmative action reveals itself most prominently through tuition.

Which speaks to the unsung value of it. See Will again. Universities would be much better off economically, at least in the near term, if they could charge not just a uniform price to students, but a high one. Except that they once again charge a variety of prices, or no price at all.

Athletes sometimes attend for free, including athletes who perhaps couldn’t necessarily get in based on academic merit. Call it affirmative action, but then a great athlete’s on-the-field exploits can result in tens of millions worth of donations, not to mention a much more academically advanced student body thanks to more applicants choosing the school based on Saturday excitement.

What’s true for athletes can be true for legacies, or children of billionaires. Maybe the former and latter lack the academics, but what about the potential fundraising implications of allowing in more legacies and children of commercial giants? If college is at least somewhat about education, why not attract the funds necessary to hire the best professors and acquire the best facilities for those professors?

After which, consider the students. It’s once again true that not everyone pays the same tuition, and one reason they don’t have to is because of affirmative action practiced with athletes, legacies, and seemingly the children of billionaires.

Race? Affirmative action based on skin color seemingly eats at people the most. It reads as reverse discrimination, and the argument has merit. But the argument seems limiting in a very real way. Interest rates instruct.

There’s once again a different interest rate for every individual and every business. Explicit in a higher rate charged the typical man on the street versus Jeff Bezos is risk. Bezos is a sure thing, the typical individual is not.

Sure, but Bezos himself formerly wasn’t a sure thing. Much more important, he was expected to fail. Thank goodness for affirmative action with capital, capital that’s produced in abundance by the sure things so that unsure ideas can get a hearing in the marketplace.

Which is perhaps a way to view colleges and their varying tuition prices. In the differences a very real market exists to our betterment, including betterment achieved by taking risks on all manner of students, including those whose credentials don’t measure up at 18 in ways they might at 48.

Originally published on Real Clear Markets.