Price regulation in a higher education market: unintended consequences?

Tuition prices have been regulated in most private higher education markets (i.e. in nearly all states) in India since at least the mid to late 1990’s. This write-up aims to shed light on some possible consequences of a fee regulation policy enacted in the Tamil Nadu engineering college market in 2017. I find suggestive evidence that the fee regulation policy which increased out-of-pocket expenses for all students and SC/ST students in particular, had two main consequences.

First, we see a 20% decline in total engineering enrollment immediately after the policy was enacted in 2017. This downward pattern is consistent across all caste groups and in particular, SC/ST students who were the only caste group with an upward trend in engineering enrollment percentages, drop their enrollment by nearly 33% the year after the policy was enacted and continue to drop in subsequent years. Second, we see that after the policy is enacted, general category students increasingly enroll in expensive and potentially higher quality private engineering colleges (affiliated to private universities). Changing the nature of fee regulations and related out-of-pocket tuition expenses for students can potentially alter students’ (i) preferences and choice of college and (ii) their potential post-college and longer term outcomes.

The policy implications of fee regulation policies can be significant and lasting. On the engineering college supply side we see that nearly 50% of engineering college seats in TN are unfilled because of decreased demand (often a direct consequence of increased prices). On the student or demand side we could suspect that poor students who are unable to access certain colleges because they are priced out of the market or have had their scholarship amount decreased will either quit engineering college admissions and pursue another degree or may even quit higher education altogether if they believe alternate degrees are not worthwhile. 

In Table 1, we see that there are three types of colleges where an aspiring engineering student in Tamil Nadu (TN) can enroll. They are Anna University (AU) Public colleges, Anna University (AU) Private colleges, commonly known as self-financed colleges, and Non-AU Private colleges. The first two types of colleges are affiliated with Anna University (the apex public engineering university in Tamil Nadu) and the third type of colleges are affiliated with private “deemed” universities. AU public colleges are generally considered to be the most elite institutions and are highly sought after by students, which naturally makes them the most competitive for admissions (e.g. College of Engineering, Guindy). AU public colleges account for about 7% of total enrollment in the state in an academic year. We observe in columns 6 and 7 that these colleges have historically been the cheapest to attend and their price has been fixed at Rs. 8k. AU private colleges account for the overwhelming bulk of both, the supply of engineering college seats (~90%) and engineering enrollment (~76%) in TN state. These colleges vary vastly in the quality of education and skills that they provide to students. Additionally they are in general more expensive than AU public colleges. Within AU colleges there are two types of seats that a student can access, namely central category seats, commonly known as “merit quota seats” and discretion seats otherwise known as “management quota seats”. 

Central seats account for the entirety of seats at AU public colleges and at least 65% of seats at AU private colleges. Admissions to central seats at AU colleges, both public and private, occur through the Tamil Nadu Engineering Admissions (TNEA) centralized process. Students submit their 12th grade board exam marks and college preferences to the TNEA. Using a centralized matching process the TNEA allocates the optimal colleges to students conditional on their board exam marks.  Note that central category seats are the only ones that have government mandated affirmative action regulations pertaining to them. Discretion seats can be awarded to students completely at the individual college’s discretion. They can be awarded based on students’ ability (measured by their board exam marks) or based purely on student willingness-to-pay or a combination of both. Non-AU private colleges which account for about 17% of enrollment on average (increasing in recent years) have no central seats and therefore no affirmative action rules pertaining to them. They are usually the most expensive engineering college seats in the market and generally provide high quality education and boast good post-college placement records. Non-AU colleges have their own admissions process separate from the TNEA. Since AU public colleges have always been cheap and Non-AU private colleges are outside the state government’s jurisdiction with regard to fee regulation, it is clear that fee regulation and affirmative action policies only affect AU private colleges. 

The main policy in question is explained in Table 2. We see that there are reserved central seats for BC (Backward Caste) and SC/ST (Scheduled Caste and Scheduled Tribe) students, at 50% and 19% respectively for each group. General category students do not have any reservations pertaining to them. As we see in columns 5 and 6 of Table 2, central seats are more expensive in absolute terms starting in 2017, but are always free for affirmative action students (i.e. BC and SC/ST). However the main change that seems to have affected SC/ST students is shown in red. In column 5 we see that SC/ST students could get admitted to discretionary seats at colleges for free, i.e. the government would bear the expense for them and compensate colleges directly. Starting in 2017, we see that the scholarship amount was capped at Rs. 50k meaning that SC/ST students need to pay Rs. 35k out of pocket for a discretionary seat that was previously free. Moreover we see that general category students who always had to pay full price for central and discretionary seats see a price increase across the board within the Anna University system.

Figure 1 helps us understand the possible implications of the fee regulation policy on enrollment of first year cohorts. There are three main takeaways from figure 1. First, in the top left panel of figure 1, we see that total freshman enrollment has been declining approximately between 3-6% yearly before 2017 but experiences its most significant decline, around 20% relative to the previous year immediately after the price regulation policy. Declining enrollment in AU private colleges is primarily responsible for this trend and enrollment in AU public and Non-AU private colleges appears quite steady across time. Second, in the bottom left panel of figure 1, we see that SC/ST students who were increasingly enrolling in engineering colleges until 2017, drop their enrollment by nearly 33% immediately after the policy and by 2019, SC/ST enrollment is 44% less than the last pre-policy year. Recall that in the pre-policy period SC/ST students could attend engineering college through central and discretionary seats for free. However in the post-policy period, they are required to pay Rs. 35k out-of-pocket for a discretionary seat. Although this amount is less than the Rs. 85k that BC or General students would have to pay for a discretion seat, we could interpret this as evidence that SC/ST students either cannot afford to pay a non-zero amount for an engineering degree, or are unwilling to pay out-of-pocket for an engineering degree. Unfortunately without separate data on enrollment in central and discretionary seats we cannot make a definitive statement about the exact number of SC/ST students in each type of seat pre and post policy. 

Third, in the bottom right panel, we see that General student enrollment at AU private colleges has been declining at the fastest rate relative to the other two caste categories. However, although General students account for only 5-10% of the population of TN they comprise anywhere between 18-25% of the engineering student body. We observe that General students are leaving AU private colleges and increasingly prefer the more expensive, likely higher quality Non-AU private colleges. In the post-policy period, as AU private colleges become even more expensive than before and the prices of AU private and Non-AU private colleges converge, we observe General enrollment at Non-AU private colleges overtake General enrollment in AU private colleges by 2019. 

It is important to understand the policy implications of this fee regulation policy. It has the potential to change marginalized students’ access to college by making colleges more expensive (i.e. discretion seats for SC/ST students) or even change the student composition of classes by making certain options (i.e. Non-AU private colleges) relatively cheaper and therefore more attractive to those who can afford them. High quality and high willingness-to-pay students departing the Anna University system and large declines in enrollment because students simply cannot afford to pay for engineering college can have deleterious effects on the entire engineering college market as colleges are no longer able to attract demand as well as labor market effects as the overall quality of engineering education could decline. 

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About advaitra8

I am pursuing a PhD in Applied Economics at the Wharton School of the University of Pennsylvania. My research interests include development economics, education, and health economics. I also enjoy causal inference, applied Bayesian modeling, machine learning, and networks. I earned an MS in Economics from the New School for Social Research and a BSc. in Economics, Mathematics, and Statistics from St. Joseph's College, Bangalore University.