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'Free Market' Will Lead to Lower Tuition? Good Luck.

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President Obama couldn't have picked a more opportune time to put colleges on notice about their rising costs. Within days of threatening colleges with the loss of some federal aid during his State of the Union address, hundreds of private-college presidents descended on Washington for their annual meeting. A few of them stuck around for the annual meeting of Christian colleges, which followed a few days later.

The talk among the college presidents about the Obama administration's proposals was similar at both meetings. While they welcomed the potential additional dollars that were part of the proposals, they didn't like the strings that were attached.

"The very issue of setting tuition is the principal fiduciary responsibility of a college," David L. Warren, the head of the private-college association, told me.

During a panel discussion at the meeting of Christian colleges, a president challenged me on the need for additional government oversight. Let the "free market" correct rising college prices on its own, he said.

The problem is, the current financing mechanism for college is far from a free market. Government subsidies account for close to 90 percent of revenues at some colleges when you add up grants, loans, and research funds. Also, nonprofit colleges are exempt from paying many taxes, and they receive tax-exempt gifts from donors.

"In the absence of a government subsidy, most colleges could not fill up their seats," argues Ronald G. Ehrenberg, a higher-education economist and professor at Cornell University. "It's silly to think that this is a free market."

Even if higher ed were a true free market, more competition hasn't led to lower prices (as it has in many other industries) because consumers have so little information on which to judge the quality of colleges. Well-informed consumers tend to make rational decisions. But in the absence of good information about colleges, students and their parents are often irrational, selecting colleges based on low sticker price (rather than net price), athletics teams, geography, or brand name.

Going to college is an "experience good," meaning you need to experience it before you can determine its value, explains Justin Wolfers, an associate professor of business and public policy at the University of Pennsylvania.

"People are making the best decisions they can, given the circumstances," Wolfers says.

But for an expense that is among the biggest of a family's lifetime (perhaps second only to the purchase of a home), we should be able to do better than rely on annual rankings from a magazine that doesn't really publish anything beyond rankings anymore.

Indeed, buried in the president's proposals was an idea to create a "college scorecard" with "essential information about college costs, graduation rates, and potential earnings." Sounds like another in a long line of failed proposals by previous administrations to provide more consumer information to families making a high-stakes decision.

Why is coming up with quality measures, an alternative to the U.S. News & World Report rankings, so difficult? For one, we say we can't agree on what constitutes quality information, although college officials seem to talk about the same measures most of the time: graduation rates, job-placement data, loan repayment, net price, and scores on tests like the Collegiate Learning Assessment.

The biggest barrier to better information, however, are colleges themselves. They have clearly benefited from confusion in the market. They might complain about the U.S. News rankings, but at least they know essentially how they're going to measure up, year to year. Any alternative, especially one based on output measures rather than input measures, might show something some colleges don't want families to really know about.

Take graduation rates. Right now, the federal definition for colleges to calculate their graduation rates potentially ignores up to 50 percent of all enrolled students. Colleges, the federal government, and state policy makers know how to create systems to better track completion rates, but the current way we do it makes it easy for colleges with low rates to blame it on the federal definition, even if their rate really is low.

Just imagine if we bought a car without some kind warranty or check-up, or a house without an inspection. We wouldn't. If colleges want to operate in the "free market" and let consumers vote with their feet, then arm students and families with the information that will allow them to make rational decisions and accept the consequences.