Policymakers should make it easier for students and their families to understand college costs and make more informed decisions.
Let’s face it — college costs are confusing. It isn’t that surprising, given the complexity of the financial aid system.
The federal government has recognized this problem and made some well-intentioned attempts to clarify those costs. Unfortunately, some of those efforts have not been effective, and in some ways, they’ve made the problem worse. But there are simple steps that can be taken that can help.
Paying for a college education isn’t like buying a dozen eggs, where the price is the same no matter the buyer. The price of a college education differs across students depending on their families’ finances, and, at many institutions, their academic qualifications. That makes it hard for students to know how much they would pay to attend a specific college.
The federal government has tried to help families better understand those costs. For instance, the Higher Education Act of 1965, as amended, requires schools to publicly report their “cost of attendance (COA),” defined as the total of a student’s education-related expenses. The COA is colloquially referenced as the “sticker price.” It differs from the “net price,” which reflects the amount students pay after financial aid. Public discussions about college costs often focus on the sticker price.
Yet very few students actually pay that amount. Students from lower- and middle-income families pay less because they often receive need-based financial aid. Students from higher-income families often pay less because they receive merit aid. Only one in seven dependent students attending four-year colleges and universities full-time pay the sticker price. Why require schools to report a higher price than most students will pay? All it does is cause confusion.
Still, it might be useful for students to know the maximum price they may face. At public and private colleges, students who are not currently eligible for need-based financial aid spend an average of $29,000 and $53,000 on net, respectively, according to my recent analysis. That compares to average sticker prices of $33,000 and $71,000. Requiring schools to post these numbers would be much more helpful than forcing them to report a number that most students won’t pay. At the very least, that would help clarify costs for students from higher-income families.
But what about others who are likely to receive need-based financial aid? The federal government tried to help them by requiring that institutions provide “net price calculators.” The idea behind these tools is straightforward: Enter basic personal and financial information and get an estimate of your net price. The estimate would not be binding, but it could give students a better idea of their potential college costs.
But the admirable goal of these tools and their practical implementation differ. They often aren’t that easy to use and can sometimes be hard to find. Congress has recognized these problems and introduced proposals to fix them. One recent bill includes provisions for a universal net price calculator. Current tools are idiosyncratic across institutions and a common interface would be very helpful.
Again, though, the devil is in the details. Such universal tools still need to be consistent with their premise — basic personal information and finances only. Making them mini financial-aid forms and asking for detailed personal information defeats the purpose. Simplicity is critical, and any proposed legislation needs to focus on that.
The Department of Justice also doesn’t help. In this domain, its goal is to prevent price fixing among colleges. As an economist, I can affirm that anti-trust policies are generally beneficial. But collusion isn’t always a bad thing.
The issue here is the extensive use of merit aid that institutions rely on to recruit students. You may wonder why private colleges set an average sticker price of $71,000 when students with no financial need pay an average of $53,000. Why don’t they just set their sticker price at the lower of the two costs?
The reason? Marketing. Many institutions offer merit awards to almost all their students. Are they really all meritorious? Probably not. But a high sticker price conveys excellence, and a large merit award makes the student feel good. That sells. Once one institution adopts that strategy, others need to follow, or they will lose students. But if they all adopt that approach, none have a competitive advantage. In economics, this is referred to as a prisoner’s dilemma.
Collusion is the appropriate solution. All colleges could agree to set realistic sticker prices and limit these merit awards. That would offer students a clearer picture of schools’ real costs. In this context, collusion should be allowed. Fear of legal action from the Department of Justice, though, is a significant impediment to doing so.
Government involvement in the marketplace is not always a bad thing. It just needs to be done in a more thoughtful way than sometimes occurs. Policymakers should make it easier for students and their families to understand college costs and make more informed decisions.
The cost of going to college is never going to be as simple as the cost of a dozen eggs, but it shouldn’t be rocket science, either.
Phillip B. Levine is Katharine Coman and A. Barton Hepburn Professor of Economics at Wellesley College.
