Information Asymmetries and the Market for Higher Education

Elizabeth Malm:

Here is how it works. Each year, a student (or more likely, their family) fills out the Free Application for Federal Student Aid (FAFSA). In this cumbersome, complicated process, families report income and other related assets. Essentially, this reports to the government the family's estimated ability to pay for higher education--not willingness to pay, but ability to pay. This is an important point. The government then calculates what is known as the "expected family contribution," which is sent to colleges, reporting what exactly the government deems a family can devote to their student's education.

Let's step back for a moment and frame this problem a little differently. Imagine you are on the market to purchase a new car. When a salesman approaches, you (the buyer) have an information advantage. You know exactly what you are willing to pay for the car based on your own personal preferences and your personal belief as to how much of your family budget you can realistically devote to purchasing the car. With this knowledge, you are in the driver's seat on negotiating the price of the car.

Posted by Jim Zellmer at July 31, 2012 2:03 AM
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