Why College Sticker Price Still Matters

Over on the Upshot at the New York Times, David Leonhardt throws a little cold (or maybe just “slightly cool”) water on the hysteria over rising tuition, noting (correctly) that the primary tuition inflation measure that the federal government used for years was based on the average sticker price of tuition, rather than the average price that students end up forking over to attend (which would include grants, scholarships, and the like). No one disputes that net prices are rising, and contrary to what Leonhardt infers, the federal government has been releasing net price figures for decades, but he’s right that the overall tuition inflation number is the one that gets cited by his media colleagues most often. The result – as in many things – has been a less-than-accurate read over how much the overall cost of college has been increasing for families.

Leonhardt likens the overall college business model to Joseph A. Bank, where it would be silly to extrapolate the “affordability” from their product from the price of one suit (since the store has a constant buy-one-get-7-suits-and-a-also-a-smartphone deal to entice consumers). If you’re less into menswear and fancy a home goods analogy instead, Ben Miller of the New America Foundation has also compared the college pricing model to ubiquitous 20% off coupons from Bed, Bath and Beyond.

The problem is that while net price gives a more accurate picture there are several reasons why sticker price, and its overwhelming increase over the past several decades, still matters.

The first reason is that, willingly or unwillingly, neither colleges nor the federal government have been able to fully communicate the actual price that students will pay to attend a given institution. On one hand, financial aid—that is, grants and scholarships, not loans—reduce the overall cost to students and act like the “sale” at Joseph A. Bank.

On the other, looking at tuition and fees alone is pretty useless if you want to understand the total bill for which a student is on the hook while in school. After all, students are also responsible for living expenses, food, books, transportation—not to mention the opportunity cost of not working (or not working full-time) while in school. Tuition and fees make up less than half of what it costs to attend college, even by the stingiest measures.

One can also make the case that the tuition sticker price underestimates the overall cost of college because students take on average longer than 4 years to graduate from 4-year institutions (and longer than 2 years to graduate from 2-year schools). Further, the “net price” after grant and scholarship aid almost never factors in interest rates on the loans that students are forced to depend upon—which can make it so a student borrows $10,000 but is really on the hook for well over twice that, depending on his or her payment schedule.

So the inability to communicate net cost of attendance makes students both overestimate and underestimate what it’s going to take to get through school.

This matters because it very much impacts students’ choices of whether and where to attend college. Many studies—including a 2012 poll conducted by the College Board—show that more than half of students are ruling out institutions, or basing their college decisions, on sticker price alone and not factoring in net cost. Either the “sale” has not been clearly communicated to them, or because it’s a lot more complicated than taking 7 suits to the checkout counter, they have removed the possibility of attending a school whose tuition has doubled over a 20 year period. This phenomenon is the reason behind the Obama Administration’s myriad efforts at “consumer information,” from the College Scorecard to standardized financial aid award letters, and even to its idea to rate colleges based partially on affordability and value.

Basically, it’s likely that most families still make decisions based on sticker price, either when a student is college-age, or well before.

But the most important reason that sticker price matters is that sticker price inflation dictates how much the federal government spends to make it so there is a net price. In other words, sticker price dictates how much the federal government has to play catch-up. High sticker price is one of the main reasons the feds dole out almost $170 billion in grants, student loans, tax incentives, and work study money each year, or nearly $70 billion in non-student loan money – money that, unlike loans, actually reduces the net price.

Beyond all this, there are some reasons to be alarmed about even the net price figures that Leonhardt cites. Others have noted that the College Board controversially includes tax credits and deductions when factoring in the net price of college – basically the tax benefits that some students and families are eligible for 9-18 months after tuition bills are due (benefits whose take-up rates are staggeringly low). We also allow colleges themselves to determine and report the cost of living (or non-tuition costs of college), which can lead to some very wacky results as Robert Kelchen, Assistant Professor at Seton Hall, thoroughly noted here a few weeks ago.

But beyond methodology, net price—which again, everyone agrees is rising well beyond inflation—is actually increasing for low-income families faster than for higher-income families (see this tool from the Dallas Morning News and others that uses federal data for more). Others, including New America and Education Trust, have also noted that even net price for low-income students represents a far bigger percentage of family income than net price for higher-income students.

By all means, the federal government—and the media that reports on it—should try to as accurately as possible determine what students are actually paying to attend college. But price tags are relevant, too. They dictate what a student’s expectations are, and they also make it so the federal government needs to play catch-up just to discount the exorbitant sticker price. Even beyond that, we have plenty of evidence—from increased borrowing to some pretty regressive increases in net price as well – that college costs are less than manageable.