It’s that time again, when boards of governors are thinking about tuition for the upcoming year; and as a result, people will be rehearsing their arguments for and against tuition increases.  The basic argument against is the rather simplistic, “higher fees means lower participation”.  And it’s wrong.  Here’s why:

The argument essentially relies on that thing everyone remembers from first-year Econ, where you draw your first supply/demand curves.  When price falls, demand rises; conversely, when price rises, demand falls.  Therefore, a rise in the price of tuition must cause a drop in demand, right?

Well, no.  For this to happen, the starting price must be a market-clearing price – that is, the price that the market will bear.  But in Canada, there are very few universities where this is the case.  In most instances, tuition is already so subsidized that the price is well-below market-clearing levels.  So it’s possible to raise the price without actually affecting aggregate demand.

Think about it: even while we worry about the effects of a price change of a few hundred dollars, we also talk about how great higher education is, and how it makes a difference of tens or hundreds of thousands of dollars in lifetime income (depending on who’s doing the counting, and how).  Well, students aren’t stupid: if there’s an investment that’s going to bring them tens or hundreds of thousands of dollars, a matter of a few hundred dollars isn’t likely to deter them.  Want a prime example?  The massive tuition hikes in the UK in 2012 – which amounted to about $10,000 per year – made almost no dent in access rates (and to the extent they did, the effects were greater among the wealthy and white than the poor and non-white).  Want more data on this?  See here, here, here, and here.

(It’s a different matter when students don’t perceive the benefits that way, which is possible; however, the correct answer in that case is to get the informational issues sorted out.)

Ah, you say.  But what if it’s not a price/value issue?  What if it’s a liquidity issue?  Sure, students understand the value of the degree, but the issue is that they can’t put the money together in the short-term.  And tuition fees make it harder to make ends meet.

Well, that’s a fair point.  Students are cash constrained.  But remember that in Canada, we hand out north of $10 billion in loans, grants, tax credits, and scholarships to students every year.  And half of our students work – maybe not the most ideal source of money for school, but it’s still a mainstay for many learners, and a source of extra income if necessary.  Most students can cover extra costs if need be, which explains why, in point of fact, enrolment over the past three decades has tripled even as tuition has risen by roughly the same.

This is not to say that tuition can be raised with impunity.  Our student aid system is generous, but also it is complicated and opaque, and in need of reform. Some students already receive maximum aid: these students may have significant difficulties in meeting tuition rises, and offsetting measures need to be taken to protect them.  And just because tuition rises in general tend not to have much effect, this doesn’t mean that all fee increases work for all institutions: depending on what local competitors are doing, tuition hikes can sometimes be counterproductive.

In other words, there are good reasons to proceed with caution on tuition fees, to set aside extra funds for vulnerable students, and urge faster reform of student aid.  But they aren’t good reasons to forego a tuition rise altogether.