The College-Cost Conundrum

“Colleges have already begun to price themselves out of the American dream.” So pronounced The New York Times … in 1973. Since then, the cost of attendance has continued to climb, roughly doubling in the last 30 years after accounting for inflation. And yet, despite the expense, enrollments continue to rise. Why? Part of the answer is that most students aren’t paying full freight. The most widely publicized cost figure, the “cost of attendance,” vastly overstates what most students pay, giving an inflated number by failing to account for financial aid.

The numbers are indeed eye-popping. At NYU, the University of Chicago, the University of Pennsylvania, and many other private institutions, the “cost of attendance” is over $80,000 for students living on campus. At publics like Penn State and the University of Colorado at Boulder, in-state costs top $30,000 and out-of-state costs top $50,000 (again, assuming the student cannot cut costs by living with relatives). These figures are, happily, misleading, and I propose a small corrective: Forget “cost of attendance” and rename it “the maximum cost of attendance.”

The problem started in 1972, when grant-based financial aid was introduced as an amendment to the 1965 Higher Education Act. The cost of attendance was introduced to prevent students from receiving “too much” federal financial aid. The law stated that grants “shall not exceed 50 per centum of the actual cost of attendance at the institution at which the student is in attendance for that year.” The “cost of attendance” is defined to include tuition, fees, room and board, and other reasonable expenses. Since then, legislation has required that the cost of attendance be disseminated through “appropriate publications, mailings, or electronic media.” It has become the most easily available price.

The problem, though, is that “cost of attendance” is a misnomer. Over 85 percent of freshman attending four-year residential colleges receive some form of financial aid; most of those students receive grant-based aid that does not need to be repaid. The sticker price is only paid by a small minority of students.

A more meaningful measure of the true cost of college is the “net price.” This reflects the amount that students pay after factoring in grant-based financial aid. In effect, it totals the amount that students and their families pay directly to the college (by “writing a check,” which could come from current income, savings, or a parent loan), pay through student employment (financed by the Federal Work-Study Program), or by student borrowing (through the Federal Direct Loan Program).

A solution to our cost conundrum suggests itself: The average net price is a better way to track college costs than “cost of attendance” (it has also risen much more slowly than cost of attendance). This statistic, though, also presents problems. Average net price sounds great, but most families are not average. What we really care about is how much are students at different income levels asked to pay. What we really want to ask is: How much does a college charge a family like mine?

That is a much harder question to answer, but there are glimmers of an answer. Since 2011, institutions are required by law to operate “net-price calculators.” These tools enable students to estimate their net price based on their own financial situation. They are often difficult to use and sometimes even hard to find, but they can provide the information parents and students need when trying to calculate true college costs.

For my forthcoming book on college costs, I wanted to see just how useful net-price calculators could be. I constructed basic financial profiles for dependent students whose parents are at the 10th, 25th, 50th, 75th, and 90th percentiles of the national income and asset distributions among families with children approaching college age. The income levels for these percentiles are roughly $20,000, $37,000, $70,000, $120,000, and $210,000, respectively (based on the 2016 Survey of Consumer Finances).

I then simulated the net price for 2018-19 for these students living on campus at 50 randomly chosen public flagship or high research intensity, or R1, institutions, as well as at 50 highly endowed private colleges (defined as an endowment per student of over $150,000). The latter group includes institutions with very large endowments like Harvard (current endowment over $50 billion for over 20,000 graduate and undergraduate students), but also institutions like Wabash College, in Indiana (current endowment around $400 million and enrollment of 840 undergraduates).

My results, shown below, indicate that all these hypothetical students, even those in the 90th financial percentile, would pay less than the “cost of attendance” at each category of institution. The lower-income/asset students would pay considerably less than the cost of attendance.

Despite this, “cost of attendance” is what drives the college-cost debate. The media routinely references rises in it as evidence of out-of-control college costs. Policy proposals are partially premised on high and rising costs of attendance. Parents overestimate college costs by more than 50 percent, most likely because of their focus on cost of attendance.

A recent guest essay by Tara Westover in The New York Times highlights the issue. Her otherwise strong essay on the value of financial aid in her life references the fact that tuition doubled at Brigham Young University since she graduated. It turns out, though, that the average net price paid by lower-income students there has changed very little since then after accounting for inflation.

BYU’s cost of attendance is currently in the $20,000-a-year ballpark, a bargain even compared to the University of Utah, which comes in at $28,000. The temptation is to praise BYU for its low sticker price. Yet those prices are only paid by students with family incomes above, say, $100,000. An irony emerges: The low costs of attendance reduce the amount of revenue collected from higher-income students. Those funds, in turn, could be used to further subsidize the net price for lower-income students. Perhaps we should be focused on BYU’s failing to meet full financial need for low-income students. The emphasis on maintaining a low sticker price in the pursuit of affordability actually makes BYU less affordable for the students who need the most help. Indeed, a recent National Bureau of Economic Research working paper found “R1 universities see gains in the representation of low-income students when tuition increases.”

This is not to say that there is no affordability problem in higher ed. Students with financial resources at the 25th percentile (around $37,000 in family income) are asked to pay a net price of $10,700 to $14,300 per year, depending on the type of institution, after incorporating all forms of grant-based financial aid, including the Pell Grant. How are they supposed to pay for that? Suppose we allow for a federal student loan at the limit of $5,500 and a work-study job paying $2,500. That would cover $8,000 of the net price. Where are the additional thousands of dollars supposed to come from? Doubling the Pell Grant would close this affordability gap. But even so, that would not close the information gap in college pricing.

The solution to the college-cost conundrum is a far more-transparent pricing system. Students need better information regarding what they would have to pay to attend college based on their own finances. That was the goal when net-price calculators were introduced. In practice, though, their well-intentioned efforts have fallen short. We should fix that system, but it will not be quick or easy.

A partial, but immediate, step in the right direction: Relabel the cost of attendance as the maximum cost of attendance. That is what it is. The change would make clear that the dollar value shown is not what a family is expected to pay, but rather the most they could possibly pay. It would also help reduce the sticker shock that makes so many families believe a college education is beyond reach.