Monday, October 4, 2010

Negative Option Billing at Schools

My son tells me that there is a big debate going on at his school over whether more student services should be included in tuition bills. This is a form of negative option billing where students who don’t want the service have to pay for it and later line up to get their money back. This kind of change creates some financial winners and some losers.

Let’s take a simple example. Suppose that a one-term bus pass costs $300. Suppose further that the students fall into three equal-size groups:

1. Those who use the bus.
2. Those who don’t use the bus and will get their money back.
3. Those who don’t use the bus but won’t bother to get their money back.

By switching to negative option billing, twice as many students pay for bus passes. Thus authorities only need to charge each student $150 for the bus pass fee part of the tuition bill. With this change, students who ride the bus win $150 and students who don’t bother to get their money back lose $150.

Of course, the real situation would be more complex. The three groups wouldn’t be of equal size. Some students who don’t bother to get their money back will probably use the bus at least a few times. Not all of the cost savings would be passed along in the form of lowering the bus pass charge on the tuition bill.

Even when we take the more realistic conditions into account, students who use the bus should get their passes cheaper under the new system. If this doesn’t turn out to be the case, then someone isn’t negotiating very well on the students’ behalf.


  1. I don't see this as negotiable.

    It's designed to be an income stream for the schools. Unethical? I think so.

  2. School billing and ethics are becoming a disjoint set these days.

  3. Behavioural economists sometimes call this "Lite paternalism".

    You induce desired behaviour in people, while maintaining free choice, by manipulating the default option. Here, the school wants to encourage people to take the bus while allowing people to opt-out if they want to.

    It's the same rationale some companies use with defined contribution pension plans. Say you can contribute 0, 3, or 6 percent to the plan. If the default is 0 and people need to opt-in, fewer will. But when the default is set to 6 but people are allowed to opt-down, most people won't bother and will end up saving more.

    It's not about revenue streams but encouraging socially responsible behaviour.

    (And at my university, there's no opt-out. Everybody gets the pass, period.)

  4. @Mark and @Big Cajun Man:

    This type of billing certainly could be structured to provide extra income for the school. I don't know how much income various schools get from negative option billing.

    @Kurt: In the case of bus passes, you're probably right that a significant part of the motivation is to encourage greater bus use. Some other items students are made to pay for but are allowed to get their money back on don't seem to have the same motivation.

  5. My university also charged everyone for the bus pass, but you couldn't opt out. I think the school was trying to promote bus use as well as add a disincentive to driving to school (ie. you already paid bus fare) because they weren't enough parking spots on campus. I didn't really understand the need to drive anyways as the bus came every 15 minutes ...

  6. @Thicken: I can remember my days of standing in long lines waiting to get back some small sum I was forced to pay for a service I didn't need.

    @Chris B: It sounds like you're one of the people who benefited from a lower-cost bus pass.

    1. The first reply above is to Thicken My Wallet's comment:

      The more things change... wow, this was a hotly contested subject when I went to university years ago. The sad fact is that the stakeholders affected the most will be leaving eventually so the administration can simply outlast the students.

  7. Mike
    I seem to recall companies that tried negative option billing were compelled to abandon the practise. Is there perhaps some legal statute forbidding it?

  8. @Larry: I would think that schools would claim that their situation is very different from the negative option billing that was practiced by some companies, even though there are obvious parallels. It would be interesting to see a legal challenge by students on this basis, though.