College tuition: On net, not so gross

I think I’ve found my nominee for the most important chart no one talks about: The difference between sticker price of college and average price net of financial aid. Over the last 20 years, tuition at a private college has shot up by almost $15,000—and everyone talks about that. What doesn’t get anywhere near as much attention is that financial aid has shot up almost as much. So, for the average student, the actual cost of private college has only increased by less than $2,500. Put another way: well over four-fifths of the tuition increases in the last 20 years have gone to increases in financial aid.

The story for public colleges is broadly similar, though all the numbers are lower. Sticker tuition has gone up about $5,000, while average tuition has barely increased at all.

This data puts changes in tuition in an entirely different light: as with a store that doubles its prices and then announces that everything is 60% off, the change in tuition has not been as dramatic as it appears.

However, this view is a bit incomplete; the difference—the crucial difference—is that everyone gets the 60% off at the store while the question of who gets the financial aid is much more complex. Indeed, the better analogy is to Barnes & Noble doubling their prices but then announcing much larger discounts for those with loyalty cards: the average price paid may remain similar, but the shift in who is paying what has changed dramatically.

So, in college who is paying what, and why should we care?

The short answer, of course, is that those with a lot of money are paying a bunch more, those with some money are paying some more, and those with no money have increased access to higher education. FN 1

The statistics bear this out. Data for the last five years isn’t available, but in 2012, students who grew up in families earning under $30,000 paid only $4,971 in tuition to attend a private college, while students from families earning over $106,000 paid nearly quadurple that amount. (And at in-state public schools, the net tuition for people from families earning under $30,000 was actually negative).

Considering how important this difference is, I’m flabbergasted that it isn’t discussed more. I want to mention an obvious advantage and then two less obvious downsides to this shift.

First, the obvious advantage: this shift has increased access to education. Having a better educated population benefits even those who don’t go to college. College education is something of a public good; normally, we pay for those with tax revenue, but finding a way to do that through cross-subsidies rather than government taxation sounds like a win. And, anyway, even the rich are getting their money’s worth: the net present value of college is around $380,000, far higher than even the highest tuition. And that’s even ignoring all the lifestyle improvements that come from better understanding the world we live in—suffice it to say, even if college for the wealthy becomes even more expensive, they’ll still be getting a bargain.

The two hidden downsides

But I think this shift has had two less obvious and less beneficial effects.

First, many, many people are not aware of the shift. The news is full of stories about how expensive college is, that say something like “to afford a private college, where the annual tuition is about $45,370 today, you’ll have to contribute $844 a month for 22 years to cover your child’s college costs.”

Not to belabor the obvious, but $844 is a lot of money for many Americans. For context, the lower third of the country spends $750 on housing. Thus, hearing that sending a kid to college costs $844/month, many people will understandably view it as way outside their price range. Many people who really could have gone to college (likely even for free, or for negative amounts of money) will think that they “can’t afford” college—that, like living in a gated subdivision or owning a new Mercedes, it’s an experience reserved for people richer than them.

What’s worse is that this very likely reinforces the non-economic class divide in the country. In America, we like to pretend that social class doesn’t exist and that the only dividing lines are purely economic in nature. But this clearly isn’t the case. Consider a starving artist, who went to college just like their parents and grandparents; compare them to someone who cleans houses for a living, has never been to college, and has a social circle comprised of friends who mostly haven’t been to college. Imagine they both earn $20,000/year and each have a kid. Which kid do you think is more likely to know about the availability of generous financial aid? Which kid is more likely to think that college is unaffordably expensive?

In a way, making college “more affordable” for people without money has just ended up making college admission screen for social class rather than economic class. Now, it’s not (as much) about being able to write a check for the full tuition amount; instead, it’s (more) about having the background, upbringing, and knowledge to be aware of and able to navigate the world of financial aid and scholarship opportunities.

The second problem

If the first problem is that some people aren’t aware of the availability of financial aid, the second problem is that some people are all-too-aware of financial aid—so aware that financial aid starts distorting their incentives.

I said above that the cross-subsidies in tuition act a bit like a tax, and unfortunately that means they can be just as distorting as a tax. I haven’t fully mastered the arcane arts of the FAFSA form, but I do know that having a lot of cash saved for college can dramatically reduce the aid an individual recives. And that can be true even for families with the same income.

To make this less abstract, let’s talk about a real family. I know a family that decided to purchase a new car shortly before their eldest child started college. Having cash in their savings account would reduce her aid, while having spent that cash on a car would result in her receiving more aid. Now, I’m not saying that this family ought not have received as much aid as they did—they had multiple children to send through college, and their car was getting pretty old. And society would probably have lost out if any of these children had received a lesser education on financial grounds. But what I am saying is that, once people are receiving financial aid, the aid policies will impact spending and saving decisions.

Whether it’s buying a car, or going on a vacation, or any other of countless spending decisions, it’s all but inevitable that the availability of financial aid impacts people’s choices. Saving for college is hard, and involves sacrifices. If the aid is structured in a way that makes those sacrifices (somewhat) meaningless, this will reduce the number of people who save—and will distort incentives in the same way as high taxation.

And so, on net …

Given all that, am I arguing that tuition should be a flat fee, with the same amount charged to everyone? No, not really. I’m arguing for something more modest: we should candidly recognize that the funding model for college has changed a lot, that this change has made the increase in the “sticker price” of college look a lot higher than it actually is, and that this shift has had some secondary impacts—some helpful and some harmful. Only when we are more frank about the impacts can we start to evaluate them and come up with strategies for mitigating any we don’t like. But it all starts with acknowledging the issue.

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6 thoughts on “College tuition: On net, not so gross”

  1. The linked page says that “Over 70% of the $19,290 in aid per student that lowers net prices for full-time students in the private nonprofit sector comes from colleges and universities in the form of discounts from their published prices.” But I tried to verify this independently, and the first source I found disagreed rather drastically:

    http://www.npr.org/sections/money/2012/08/08/158419870/paying-for-college-financial-aid-in-america-in-2-graphics

    I’m not really sure what’s going on here.

    1. Hmm, I’m not entirely sure either from a quick look. However, I note that the NPR source you link states that “The figures in this post come from the College Board’s report Trends in Student Aid, which has lots more data.” And that College Board report is the exact same report I linked to!

      So the two sets of statistics must be more similar than they look at first blush—indeed, they must be identical.

      I think part of what is going on is that the NPR article aggregates all colleges, while the 70% number you cited is just for private four-year colleges. The NPR graph also includes loans, while the 70% number is just grant aid (i.e., scholarships that reduce net tuition).

      It feels like those two things aren’t enough to fully explain the discrepancy, though. Hmm…

  2. The analysis might be spot on, but looking at averages can really hide a lot of important information. The devil in the details and so forth. I don’t think I see a break down of the numbers by financial status (that is, by the incomes of the families.) It may well be that there is more aid flowing and thus net costs are down, but if that aid is disproportionately going to certain income brackets, at some point a middle-class family might have a total increase in net cost.

    Also important is whether they’re distinguishing between loans and grants when they count aid. A Stafford Loan might be a boon, but that still has to be paid back, so I don’t think it ought to count as aid, per se.

    Just for kicks and grins, I went to a FAFSA calculator and assumed that my kids were 18 and prepping for college. Assuming total annual costs of $25,000 (not unreasonable for in-state tuition or a modest private school), they’d get a total of ~$10,000 in aid. I don’t know how that compares, but that remaining $15,000 (or $60k after four years) is not negligible. Is that affordable?

    They also gave an EFC of $3,000. I have twins, so that bumps up to $6k if they both go to college. I mean, perhaps the numbers look good for people making less than me, but that EFC is ~10% of my gross income; that’s wildly unlikely.

  3. When I was in high school (I graduated high school in 1988), I looked at directories of colleges as kind of a hobby. The great majority of four year state schools had an in-state tuition/fees/room/board total annual sticker price under $5,000 (maybe about $10,000 is today’s money). The linked chart has annual non-tuition expenses over $13,000. So it looks like the schools have also raised non-tuition expenses enormously, and total costs have likely gone up, even for the class of people whose net tuition is now negative.

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