Price Discrimination and Public Policy in the U.S. College Market

Abstract

In the United States, a form called the Free Application for Federal Student Aid, or FAFSA, is used to determine eligibility for federal aid. The FAFSA collects extensive financial information, checks it for accuracy against several government databases, including the IRS, and then shares the information with colleges. I demonstrate that sharing the FAFSA with colleges enables them to engage in substantial price discrimination with widespread repercussions for the cost of a college education as well as the equilibrium sorting of students into colleges. I build a structural model of college pricing and price discrimination, and show that the model is identified from student-level data on prices and student characteristics. Reduced form estimates are consistent with several predictions of the model. According to my structural estimates, on average elite colleges capture 70% of the student-college match surplus through their student-specific prices. Withholding FAFSA information would lower prices for middle- and high-income students while raising them for low-income students. On average prices would fall by $825, and the within-college price variance would also drop by 17%. By using the FAFSA to price discriminate, elite colleges effectively levy a 1.9% tax on adjusted gross income coupled with a $709 lump sum rebate. However, with less information to use when price discriminating, they would inefficiently price up to 12% of students out of the elite market. My results highlight a policy tradeoff between increasing the welfare of middle- and high-income students at the expense of total efficiency, college welfare, and the welfare of low-income students.