Why should this be the case? They offer a service with hundreds of competing options (other schools), so it's hard to argue they're not offering market rate.
I think the infinite access to loans is destroying any connection between market pricing and desirability. People at the age of 17 or 18 when they're going into college tend to have minimal to no knowledge of the workforce, and tend to be completely unrealistic about their own probable outcomes. More than 50% [1] of Americans under the age of 30 expect to become what they consider "rich." That was from 2003, but it was repeated in 2010 and yielded near identical results. [2] What does an extra $20k/year in debt matter if you're going to be a millionaire in a decade anyhow? When people's views of the value of something is completely out of touch with reality, they are rarely going to be incentivized to make logical decisions.
This feature also makes the entire for profit education industry quite predatory. I realize public institutions are ostensibly not for profit. At the same time, when you have higher executives taking salaries in the millions of dollars, and layer upon layer of redundant administrators with comparably bloated salaries, that they then regularly adjust upwards as "their revenue" increases, that belies the intuition of 'not for profit.' So forgive my colloquial nature.
The market is much smaller than you think especially for public universities because of the huge difference between in and out of state student rates. That means most students can only really consider in state schools where there's at most a handful and generally they've each got a few things they're known to be 'the good one' for that subject/field.
Do they though? Do public universities really have competition? Maryland has College Park and not much else. All the other public schools are much much smaller, and generally lower quality.
This isn't the 1850s, UMD essentially competes with at least the other east coast public schools. So you have Penn State and UVA, as well as UD, Va Tech, GA Tech, UNC, etc.
Add to that the negligible degree to which attending "the best school" effects your outcomes (spoiler: virtually not at all. Being in the top 25% at your school far outweighs how good your school is) and you'll realize that they compete heavily. This totally leaves out all the private schools with which they compete in the DC area.
Except not really because the cost for going to an out of state public school is much larger for a student so any given school has a large leg up on cost in competing for students in their state.
Except not really because most State schools on the East coast will give you in-state tuition after you live in said State for one year. Take a year off after highschool, make some money, then get in-state at whichever school you chose.
Source: many of my friends graduated college a year behind me after doing exactly what I'm suggesting.
This feature also makes the entire for profit education industry quite predatory. I realize public institutions are ostensibly not for profit. At the same time, when you have higher executives taking salaries in the millions of dollars, and layer upon layer of redundant administrators with comparably bloated salaries, that they then regularly adjust upwards as "their revenue" increases, that belies the intuition of 'not for profit.' So forgive my colloquial nature.
[1] - http://news.gallup.com/poll/7981/Half-Young-People-Expect-St...
[2] - http://www.bankrate.com/banking/savings/do-you-think-you-wil...