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By EDWARD B. FISKE
c.1985 N.Y. Times News Service
    When Laura Hurwitt opened her letter of acceptance from the College
of Wooster in Ohio last month, she found that she had been offered an
unsolicited scholarship of $1,000 a year. To her father, who heads
the breakfast foods division of General Foods, it struck a familiar
chord.
    ''It reminded me of how we give out coupons good for 25 cents on the
next purchase of Post Raisin Bran,'' said David F. Hurwitt, who lives
in Darien, Conn. ''Laura was offered a 10 percent discount on a
college education.''
    The Hurwitts' experience was an outgrowth of major changes that
economists say are blurring pricing policy differences between higher
education and other extremely competitive industries such as
automobiles and airlines.
    Most colleges and universities have announced tuition increases for
next fall in the range 7 to 10 percent, changes that are lower than
those of recent years but still twice the rate of growth in the
Consumer Price Index.
    The institutions justify such increases on a variety of grounds,
from the labor-intensive nature of college teaching to cutbacks in
federal aid for students.
    But interviews with economists, college financial officers and
others across the country suggest that the real reasons are far more
complicated and involve some little-noticed assumptions and practices
in the setting of fees. Among them are these:
    -Many colleges have relatively few incentives to keep costs low and
set published tuitions as high as the market will bear.
    -Discounts of various kinds are routinely offered to certain
categories of students.
    -Officials of competing colleges frequently share financial
information in ways that, some concede, would be illegal in the
commercial sector.
    -Tuitions are structured so that undergraduates subsidize Ph.D.
candidates, wealthy students help poor ones, and students in certain
majors, philosophy for example, subsidize those in other majors,
engineering for instance.
    These pricing policies arise because, with competition for able
students increasing, colleges often try not to keep tuitions low but
to spend as much as possible on academic quality, then redistribute
their resources by offering discounts to selected students.
    The new forms of discounts range from merit scholarships for
middle-class students to foreign student tuition indexed to the
strength of the dollar in their home countries. Like automobile
dealers, colleges are attracting customers with sophisticated
financing arrangements, many of them designed to help wealthy
families use the tax code to ease educational costs.
    ''We are all trying to outsmart each other in what is probably the
most competitive industry in the country,'' said Eamon M. Kelly, the
president of Tulane University. ''Tuitions don't go up at the rate
they do because we're labor-intensive. Tuitions go up because we have
become a discounting industry.''
    The process of setting tuitions is complex.
    Although they face the same general costs, private colleges and
universities as a group cannot match the price of public
institutions. Instead, they base their appeal primarily on academic
quality - a principle that applies to competition within the private
sector itself. ''Overwhelmingly, students and families choose an
institution on the basis of academic quality and not price,'' said
Neil L. Rudenstine, the provost of Princeton University.
    Recent admissions statistics show that applications to many of the
most expensive and selective schools have been increasing even faster
than tuition. At Bowdoin College, for example, where tuition has
risen by 16 percent in the last two years, applications have been up
by a quarter. ''People are looking for a quality education, and they
feel the expense is worth it,'' said Thomas L. Deveaux, associate
director of admissions.
    One consequence of this is that, given the choice of lowering
tuitions or increasing quality, top academic institutions face a
strong temptation to choose the latter course. For this reason, most
colleges that have high endowments - and are thus in a position to
lower tuitions if they choose - also tend to have the highest
tuitions.
    ''The basic operating theory is to raise all the money you can and
then spend it all,'' said Howard Bowen of the Claremont Graduate
School, a leading expert on higher education finance. ''That's the
way most arts and social service organizations do it, from the United
Way to the Salvation Army. Higher education presents many
opportunities for spending money wisely and productively.''
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NYT UNDATED: and productively.''
    Timothy Warner, an associate provost at Stanford University, said
planners there build an annual two percent ''quality increase'' into
the budget. ''Each year will see some real acadmemic improvements,
from computing to Western Civilization to dormitories,'' he said.
''This says that we are in the business of trying to improve
quality.''
    Some officials even say it is difficult to project an image of high
academic quality in the absence of high tuitions. ''This isn't
something they will tell you on the record, but there is a kind of
macho attitude,'' said F. Frederick Starr, the president of Oberlin
College. ''People say, 'Boy, that's a high-priced place, but people
are tripping over themselves to get into it. They must be terrific.'''
    Colleges have sometimes intentionally raised their tuitions for
marketing and related reasons. For many years Bennington College,
which had no endowment, made a point of being the most expensive
college in the country. In the late 1970s the University of Chicago
concluded that it was ''under-priced'' for the quality of education
it was offering and began increasing tuition at a faster pace. ''We
were underpriced by $1,000 to $2,000,'' said Hannah Gray, the
president. ''We're still lower than our competition, but we had some
room for increases.''
    Most private colleges have a group of peer institutions with which
they compete, and in setting tuitions a primary goal is to stay in
line with the competition.
    Bernard R. Carman, spokesman for Lafayette College in Pennsylvania,
said his institution regularly exchanges information with 27 other
small liberal arts institutions, from Amherst College in
Massachusetts to nearby Susquehanna College, and uses this
information as a benchmark. ''We normally assume we will fall
somewhere in the middle third,'' he said. ''If we found ourselves up
in the top 10 percent or at the lower end, we'd probably go back and
take another look.''
    Starr said there is a ''tremendous underground communications
network between college administrators'' in the early phase of the
budgeting process. ''It's like runners positioning themselves at the
beginning of the race,'' he commented.
    Sheldon E. Steinbach, general counsel of the American Council on
Education, the major national higher education coordinating body,
said, ''If Ford, General Motors and Chrysler sat down and did what
colleges do, they would be in violation of anti-trust laws.'' He
emphasized, however, that such legislation has never been construed
as applying to non-commercial activities and that ''tuition only pays
a small fraction of the cost of education.''
    Phillip E. Areeda, an anti-trust expert at the Harvard Law School,
said that the federal legislation does not specifically exempt
non-profit enterprises and pointed out that education is an industry
with a large number of suppliers. ''With this kind of multiplicity,
mere information exchanges, even if commercial, are not necessarily
unlawful,'' he said.
    To sustain or improve quality, private colleges have developed a
variety of internal subsidies that have an impact on the amount of
tuition a particular student will pay.
    Many research universities, for example, use tuition income from
undergraduates to subsidize graduate students and research programs.
Graduate students pay tuition, but many receive fellowships or hold
jobs as teaching assistants that are supported to an extent by
undergraduates' tuition payments. ''Our graduate students in arts and
sciences get a free ride,'' said Kelly of Tulane. ''The overhead
costs are paid by undergraduates.''
    Katharine H. Hanson, executive director of the Consortium on
Financing Higher Education, said that in this group of 30 selective
private institutions the cost of a year at undergraduate liberal arts
colleges tends to be ''$1,000 to $2,000 lower'' than the cost at a
research university of comparable academic reputation.
    Another factor is the use of revenues from students in such low-cost
academic areas as the arts and humanities to pay for instruction in
science, which is much more expensive. ''Science is a very expensive
labor market,'' said Starr of Oberlin, a liberal arts college that
has traditionally been strong in the natural sciences. ''There's a
correlation between high tuition and high commitment to science.''
    Finally, colleges are increasingly using income from wealthy
students to subsidize the education of poor and middle-class students.
    Swarthmore College decided that it had been not been charging
wealthy students enough, so it has announced an 11 percent increase
for this fall in order to restructure its financial aid packages.
''We decided we have fewer students from low-income families than we
should,'' said David Fraser, the president, ''so we are lowering the
amount of loans we offer and increasing the amount of outright
grants.''
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NYT UNDATED: outright grants.''
    Some critics argue that this ''Robin Hood'' approach is unfair to
students who pay the full amount. College officials reply, however,
that since tuition revenues cover only a portion of operating costs,
even students who pay the full tuition are receiving a subsidy from
endowment, gifts and other income.
    They also argue that socio-economic diversity is intrinsic to the
quality of the educational experience they offer and that it would be
impossible to recruit top students without pouring substantial
amounts into financial aid. ''If you define the pool of students who
met our academic standards and had the money to pay, you're only
talking about 18,000 people in the entire country,'' said Arnold R.
Weber, the president of Northwestern University in Illinois.
    Economists specializing in higher education also point out that,
despite the apparent lack of incentives for many 6institutions to keep
tuition levels low, the inexorable rise in tution rates can be
deceiving. Another major trend - one that mitigates the
above-inflation tuition increases - is the widespread practice of
''discounting.''
    Robert Zemsky, an economist at the University of Pennsylvania,
suggested that the pricing of higher education is increasingly coming
to resemble that of the automobile industry. ''You have to look at
college tuitions the way you look at a car,'' he said. ''You have a
sticker price, a discount price and a cash price, and most people get
some kind of a deal.''
    Zemsky traces the concept of discounting to the federal student
assistance programs in the mid-1970s. Poor students could have almost
their entire education subsidized, but even wealthy ones paid a lower
''cash price'' because they had access to loans that were
interest-free for as long as four years and repaid in inflated, and
thus cheaper, dollars. ''Go back to the automobile analogy,'' said
Zemsky. ''It didn't matter what the sticker said. It was the monthly
payments that mattered.''
    According to the American Council on Education, two-thirds of
undergraduates in private colleges and universities and one-third of
those in public institutions receive some sort of financial
assistance. The leveling off of federal student assistance programs
in the last three years has forced colleges to assume more of the
burden. ''Consumers became accustomed to discounting,'' said Zemsky.
''But now the colleges are having to fund the discounting out of
their own pockets.''
    In recent years the process of discounting the published tuition
price has become not only more widespread but more sophisticated.
With the exception of Ivy League and several dozen other highly
selective institutions, almost all private colleges and universities
offer at least a small number of ''merit scholarships'' to
academically able students who would not otherwise qualify for
financial assistance.
    The unsolicited $1,000 a year scholarship that the College of
Wooster offered Laura Hurwitt, a senior at The Principia, a private
school in St. Louis, fell into this category, and her father said his
reaction was a positive one. ''Every industry has its discounting
lingo,'' said the General Foods executive. ''We have coupons. The
airlines have APEX fares. Colleges call it scholarships.''
    Even some Ivy League schools have recently begun engaging in what is
known as ''differential packaging'' of financial aid. Cornell
University, for example, divides applicants who are accepted with the
promise of financial aid into three categories depending on how eager
it is to enroll them. The most ''desirable'' students are then
offered a higher proportion of their aid in the form of grants rather
than loans.
    In some cases, especially those involving wealthy students, the
discounting involves sophisticated financial maneuvering. The
University of Pennsylvania developed its pioneering Penn Plan, which,
among other options, allows parents to pre-pay four years of tuition
with borrowed funds at the freshman year rate. Key to this approach
is the fact that the family can take advantage of tax deductions on
the interest payments. ''What you buy depends on what kind of
financing you can get,'' said Zemsky, who helped design the Penn Plan.
    Many colleges, especially those in highly competitive markets, are
moving vigorously to develop as many kinds of discounts as possible
do as to maximize the amount of income they rece,e. ''We're very
conscious that we compete with the University of Connecticut and that
our tuition is six times what theirs is, so we're doing everything we
can to reduce the de facto tuition,'' said Leland Myles, the
president of the University of Bridgeport.
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NYT UNDATED: of Bridgeport.
    ''We have a big financial aid program, and we're moving heavily into
cooperative education. We're doing what I never would have dreamed of
10 years ago: charging different tuitions in different programs. You
pay more to study dental hygiene than engineering and less to study
liberal arts. We're freezing tuition for juniors and seniors, and we
will probably begin adjusting the tuition rates that international
students pay to reflect the relative strength of the dollar in their
home countries.''
    Some colleges have attempted to move in opposite directions. Several
years ago Bard College decided that it was over-priced in relation to
its competition and that this was reducing its appeal to middle-class
students. Through fund-raising it has now reduced from 92 to 82
percent the proportion of the operating budget sustained by tuition.
''We are still more expensive than Vassar,'' said Leon Botstein, the
president, ''but we are less more expensive than we used to be.''
    The New School for Social Research in Manhattan has a formal policy
of reducing the rate of undergraduate tuition increase by 1 percent a
year. ''It went up 11 percent in 1982, then 10, 9 and 8 next fall,''
said Jonathan Fanton, the president.
    One unpredictable element is changing public attitudes toward
education. Hanson of the consortium cited a ''perceived diminution in
the value of a college education'' in some quarters and suggested
that families today have different priorities for major purchases.
''People are more worried about retirement,'' she said. ''A lot of
people seem to be saying: my kid needs to go to college, but I don't
want to be eating cat food 20 years from now. There's less
willingness to sacrifice their own future. The advent of the
Individual Retirement Account also means that people have something
new to do with that $2,000.''
    Botstein of Bard related it to changing lifestyles. ''The bubble
could break,'' he commented. ''Public universities are getting
better, and people are saying 'If I send my child to UConn, I can
still take that vacation.''
    Still others fear that the major effect of current trends will be to
price the poor out of good higher education. ''It basically means
that you get a lot more kids from Scarsdale,'' said Liz Kashner, a
freshman at Brown University who is from Scarsdale. ''There's nine in
the freshman class right now. How many more do we need?''
    Robert Reichley, vice president for university relations at Brown,
pointed out that universities such as his face relatively little
pressure from alumni or other groups to keep tuition down. The main
pressure is the self-imposed desire to keep such institutions from
becoming geared to the wealthy. ''The real pressure is the part that
you don't see - the people who don't apply,'' he said. ''That's the
unspoken pressure.''
    
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