Are Universities Nonprofit Public Goods or Self-Interested Businesses?

A nearly 30-year-old federal law is under scrutiny after several former students sued the nation’s most elite universities earlier this year. The University of Chicago, Northwestern, Georgetown, Duke, and the University of Pennsylvania are among those accused of manipulating financial aid rules to overcharge as many as 170,000 students. 

Universities may collaborate on financial aid offers as long as they remain “need blind”—in other words, as long as they do not consider an applicant’s ability to pay. A federal lawsuit filed in Illinois on January 9 alleges that nine of the 16 named universities circumvented this policy by engaging in secretive practices (“enrollment management”) and collusion with other schools. These practices ultimately resulted in smaller financial aid packages for lower-income students and higher admission rates for wealthy applicants who could afford to pay more. 

The federal law at issue is Section 568 of the Improving America’s Schools Act of 1994, which exempted universities from antitrust laws and allowed them to collaborate on financial aid decisions. Congress has reauthorized the statute five times, most recently in 2015. It’s set to expire in September unless Congress renews it again. 

Under the circumstances, Congress would do well to take a second look at Section 568. Antitrust exemptions perpetuate the questionable status of universities as public interest nonprofits even though they increasingly appear to function as highly profitable businesses.

Congress passed the 1994 law after the Department of Justice’s antitrust division investigated the financial aid practices of Ivy League universities and MIT in the early 1990s. The goverment claimed then, as the current plaintiffs allege now, that the universities had colluded to fix financial aid packages for applicants, and thus denied families the ability to compare real costs and discounts across schools. Most of the investigations were closed in 1991 after the schools agreed to collaborate only where the law expressly permitted it.  

MIT, however, did not settle. Instead, the university insisted it was not a “manufacturer of toaster ovens or porcelain fixtures,” but rather a public interest nonprofit that offered services for the betterment of society. MIT argued that college financial aid should be considered a charitable contribution rather than a price-setting mechanism. 

This line of reasoning is highly questionable. Grocery stores could use the same logic to claim that their magazine coupons allow customers to receive food, essential products for survival. But we don’t see store owners making such claims.

The case against MIT was eventually settled—but only after MIT successfully obscured what it means for a university to provide a good or service, as seen in the Third U.S. Circuit Court of Appeals’ opinion in the case:

This alleged pure altruistic motive and alleged absence of a revenue maximizing purpose contribute to our uncertainty with regard to . . . anti-competitiveness, and thus prompts us to . . .  refrain from declaring [MIT’s conduct] per se unreasonable.

Universities’ need-based financial aid game is the kind of price discrimination that companies like Amazon and Walmart can only dream of. The application process gives colleges broad access to a student’s personal financial information, enabling them to charge that student the maximum amount in tuition based on his (or his family’s) ability to pay. Such blatant price discrimination is not only unfair to those charged more. It’s also a form of wealth redistribution decided behind closed doors and carried out by the world’s richest institutions—and with other people’s money. 

Like most businesses, universities seek to increase revenues to expand their budgets and their amenities—think campus zip lines, social justice bureaucrats, and ballooning presidential salaries. They subsidize these extravagances with tuition dollars paid by American families and debt-ridden graduates (college costs have nearly tripled since 1980). Is this really the “betterment of society”?

It’s high time we ask some (not-so-hard) questions: Are universities really concerned about society’s greater good? Or are they self-interested businesses?

Should universities be allowed to engage in wealth redistribution in a way that other businesses can’t?  

Should prospective students and their families be made aware of these price fixing mechanisms and the special exemptions schools claim?

Should schools even have such special exemptions?

The conversation will be interesting. And Congress can get it started by revisiting Section 568.

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About Theresa R. Manning and Neetu Arnold

Teresa R. Manning is the Policy Director at the National Association of Scholars, Vice-President of Virginia Scholars and former law professor at Scalia Law School, George Mason University. Neetu Arnold is a Senior Research Associate at the National Association of Scholars and the author of Priced Out: What College Costs America. Follow her on Twitter @neetu_arnold

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