Marginal Pricing and Student Investment in Higher Education

December 2014
Steven Hemelt, Kevin Stange

This paper examines the effect of marginal price on students’ educational investments using rich administrative data on students at Michigan public universities. Marginal price refers to the amount colleges charge for each additional credit taken in a semester. Institutions differ in how they price credits above the full-time minimum (of 12 credits), with many institutions reducing the marginal price of such credits to zero. We find that a zero marginal price induces a modest share of students (i.e., 7 percent) to attempt up to one additional class (i.e., three credits) but also increases withdrawals and lowers course performance. The analysis generally suggests minimal impacts on credits earned and the likelihood of meeting “on-time” benchmarks toward college completion, though estimates for these outcomes are less precise and more variable across specifications. Consistent with theory, the effect on attempted credits is largest among students who would otherwise locate at the full-time minimum, which includes lower-achieving and socioeconomically disadvantaged students.