The proposal that Miami University, in Ohio, made this month to raise the level of its in-state tuition ($7,600) to the level of its out-of-state tuition ($16,300) has prompted both plaudits and cries of anguish from people throughout higher education.

Some observers see the move as a creative response to state budget cutbacks for public higher education. Others see it as a further retreat from the nation's goal of providing educational opportunity, regardless of income. Whatever the case, it is worth attempting to understand the motivation for, and potential impact of, the change -- not only because it is so striking and drastic, but also because so many public institutions around the country are searching for financing alternatives.

Miami's Board of Trustees is scheduled to review the proposal at the end of the month. From the institution's perspective, the proposal is a rational effort to enhance its prestige and educational quality, measured both by the composition of the student body and by tuition revenue. Miami is a "Public Ivy" -- it draws heavily on out-of-state students, many of whom perceive that they are buying the equivalent of a private higher education at a bargain price. Last year, the university received a total of 13,850 applications for 3,450 slots; this year, out-of-state applications increased by 24 percent. Meanwhile, 72 percent of the 16,621 students enrolled are Ohio residents -- who pay the lower tuition rate. It does not take a genius to realize that, from Miami's vantage point, substantial sums are being left on the table.

The rejoinder, of course, is to argue that Miami is a public institution, and the lower in-state tuition reflects the tax support provided by Ohio residents. Acknowledging that fact, the university plans to provide every in-state student with an Ohio Resident Scholarship, to be valued in 2004 at $5,000 per student. (Interestingly, that figure is almost precisely what the $60-million state appropriation yields to the 11,970 Ohio students currently enrolled.) Thus, the actual in-state tuition increase would be $3,700 ($7,600 to $11,300), a jump of 48.7 percent. While that rate of increase is exceptionally high by historic standards, it is not shocking in today's world.

The university's argument is that the substantial demand from out-of-state students for a Miami education priced at $16,300 establishes the market value of the education and, therefore -- with compensation to Ohio residents for their tax support -- it is simply pricing at market for everyone. Further, many Miami students come from wealth; 54 percent of their families earn annual incomes above $100,000. That situation introduces the second part of the strategy embodied in the proposal: the ability to compete more effectively in student recruiting through the strategic use of financial aid.

Under the proposed pricing scheme, Miami would be better positioned to engage in the financial-leveraging game that many private colleges play. While a small number of highly selective institutions claim to offer only need-based aid and to follow "need blind" admissions, most private institutions strategically use aid to assemble a specific class, giving tuition discounts in the form of financial-aid awards to students who may or may not have financial need but whom the institution finds particularly attractive, or "meritorious."

That game has evolved from simpler times when aid was allocated primarily to meet students' financial needs, and to some extent has been forced on private colleges by competition. Many private colleges could not fill their entering classes without discounting tuition selectively to students with little or no financial need.

Although it is used to some degree by nearly all private colleges, such merit aid remains controversial. It violates the principle of equal treatment of people with equal resources and shifts financial aid away from needy students to those with higher family incomes. The negative reaction of some commentators to the Miami proposal reflects their distaste for seeing that policy shifted so explicitly to the public sector, which is supposed to operate by different rules.

Miami would use the financial headroom provided by higher tuition revenues to generate a second set of discretionary grants, called Ohio Leader Scholarships, which would be awarded largely on merit to students who either have found the current tuition too high or have competitive offers from other, mostly private, colleges. The university offers the hypothetical example of an Ohio student from a family with an $80,000 income who would receive the $5,000 Resident Scholarship and be awarded a $5,800 Leader Scholarship, thereby reducing net tuition cost to $5,500 -- in fact, lower than the current in-state tuition. A second example shows an Ohio student from a family with a $250,000 income who would receive the $5,000 Resident Scholarship and be awarded a $2,200 Leader Scholarship (clearly based on merit, not need), leaving net tuition of $9,100, higher than the current rate. As those two cases demonstrate, the new policy would allow money to be shifted from very-high-income families to upper-middle-income families, a pattern commonly found in private-college tuition discounting. If both students accept, Miami will have met its strategic objectives.

But what about low-income students? A third example shows an Ohio student from a family with a $30,000 income, who would receive the $5,000 Resident Scholarship, a $4,700 Leader Scholarship, and $5,400 in Pell Grants and other aid, for a net tuition of only $1,200. The critical policy issue for low-income students, as demonstrated by that example, would hinge on the discretionary $4,700 Leader Scholarship, which by no means would be guaranteed. Take away that grant, and the student would be looking at a net price of $5,900, rather than $2,200 under the current in-state rate, with Pell Grants and other aid. If Miami's program goes into operation, low-income students who are not awarded sizable Leader Scholarships will effectively be priced out. Therein lies the rub.

It is worth contrasting Miami's discretionary plan -- which allows the admissions committee and financial-aid office quite a bit of discretion in making awards -- with a much older idea, known as high tuition, high aid. Under the latter, an institution would raise tuition to about the average cost to educate each student, and then state subsidies would be allocated to students based on financial need. Many economists have supported that policy for public institutions, arguing that wealthy students can easily pay the higher cost, while lower-income students receive enough aid to make enrollment possible. Thus, a given amount of public subsidy would be spent in the most efficient way to maximize enrollments per tax dollar.

Public institutions are moving in that direction to the extent that they can, while state governments are lagging behind in providing the necessary financial aid. The large subsidies that public institutions currently provide to wealthy students through below-cost tuition are a dead-weight loss to society, because such students would enroll without subsidies. A policy of low tuition is, in many ways, the equivalent of giving large scholarships to all students, regardless of need. No one (or so we used to think) would ever propose such an inefficient scholarship program, although the advent of state merit-based programs, such as Georgia's HOPE Scholarships, has exposed economists as poor political prognosticators.

Miami is not a typical public, with so many high-income students, and hence can try this new approach. Most nonselective publics could do so in principle, but for an institution with a mostly low-income population, there would be little point in raising tuition and then giving most of it back in financial aid. To evaluate the likely outcome for low-income students at Miami, one would have to examine its admissions and financial-aid processes in detail.

If Miami officials decide to use their newfound financial leverage on a merit basis to recruit upper-income students whom they are now losing to private colleges, we should not applaud them on grounds of social policy, no matter how much it may enhance the status and prestige of Miami University. If, however, they devote substantial new resources to identifying and attracting talented youngsters from low-income families, then the approach could be a good second-best to the pure high-tuition, high-aid approach. I say second-best because some portion of the new revenues will still be directed on a pure merit basis to students who do not need the aid, but who choose Miami over other colleges because of it. The amount spent on merit aid as opposed to need-based aid is the critical ratio -- the higher the amount spent on merit aid, the lower the social benefit.

Given the way the proposal is structured, a further issue concerns the role of sticker prices in signaling value to prospective students. That issue cuts two ways. For the more privileged students who are shopping around for colleges, posted price is often used as a signal of quality; indeed, Miami officials believe that the current in-state rate harms the university's ability to recruit high-end students within Ohio.

On the other hand, the new $16,300 in-state rate may serve to discourage less sophisticated students, who may not understand the complicated discount structure that serves to reduce that charge to a lower net price. Suffice it to say that the onus will be on Miami officials to explain to in-state students that the price quoted is actually $5,000 higher than they will be charged before any further discounts. It might have been simpler to quote an in-state rate of $11,300, but that would have lost some of the appeal of the signal sent by the higher rate -- perhaps a dubious gain.

We live in a time of significant turmoil and change in the financing of public higher education. Old rationales for state subsidies to higher education (public benefit, equal opportunity) are being discarded in favor of an intensely competitive focus on market behavior and private value. The Miami example highlights the tension that exists within many public universities, most of which do not have Miami's option of emulating private-college behavior.

While the proposal is unlikely to be widely copied -- in part because many state legislators will not allow in-state undergraduate tuition to rise to such levels -- it is a clear sign of the financial issues with which most public institutions are struggling. The core dilemmas are how to maintain educational quality as state support drops, and how to maintain affordability, particularly for low-income students, as tuition rises. Miami, like a small number of other "Public Ivies," can pursue radical departures in public finance. Most public institutions, however, will be forced into uneasy compromises.

David W. Breneman is a university professor and dean of the Curry School of Education at the University of Virginia.