Thursday, October 21, 2010

Sticker Price Really Does Matter

by Jonathan Robe

Last week economist Peter Sacks had a couple of essays published by MindingtheCampus (you can find them here and here) arguing that the "published prices [i.e. "sticker prices"] of higher education are virtually meaningless" and that the "far more important number is net price, which is the cost of attendance (tuition sticker price plus expenses) less federal, state and, especially, institutional grants."

On this count, Sacks is mistaken, and there are several reasons why. First of all, in his analysis of published vs. net price, he ignores the fact that a significant number of students don't receive any type of financial aid at all, whether it is in the form of grants, loans or work study. According to the NCES, only 79.5% of full-time full-year students receive any type of aid (and only 80.7% of students from families making less than $20,000 in income). For 20% of all full-time full-year students, the sticker price is all there is when it comes to paying for college.

Second, the net price figures Sacks cites in his essays are discounted by both grants and loans. But students are, ultimately, responsible for repaying any loan aid they received; they just have a time delay between the time they get the educational service and the time they have to pay. For some students, the debt they accumulate in order to attend college can be quite crushing. Students from the most affluent families don't need to take on debt to pay for college, so the people most likely to take out the large student loans would be those from families with more limited--but not negligible--financial resources. In order to make a more accurate assessment of the costs born by students, we need to look at the percentage of students receiving non-loan aid: at Harvard, fully 30% of all undergrads either have to pay the full sticker price now or take out loans to cover the cost of their college education. At Stanford, that number is 27%, at Columbia it is 53%, at Yale it's 46%. Thus, even at the most elite and expensive schools, thousands of students still have to cover the entire cost of college.

Third, it is a bit misleading to refer to Harvard's current level of financial support for low-income students as "generous." If Harvard or Yale or Princeton wanted to do low-income students a real favor, they would give them full-tuition discounts. Given their vast multi-billion dollar endowments (the GDP of some European countries is dwarfed by the combined endowments of Harvard, Yale and Princeton), anything less than full-tuition discounts really amounts to these schools getting as much money from their students as they can. Sacks indirectly acknowledges this when he notes, towards the end of his first essay, that the percentage of students with Pell Grants at some of the most elite schools is appallingly low (this is true, by the way, even of public universities as well, such as the University of Virginia). In fact, if schools such as Harvard and Yale were really serious about making tuition affordable, they could use their endowment wealth to give all but the very richest undergrads full-tuition scholarships.

Fourth, as my colleague Matthew Denhart has pointed out to me, when high school students and their families are comparing costs between schools, they look at the sticker prices precisely because they don't know in advance the exact amount of aid, if any, they will receive. In fact, how much financial aid a particular student receives often isn't known until after they are admitted to a particular institution and possibly even after the student has committed to attending. Furthermore, just because an incoming freshman has received a relatively large aid package for the first year doesn't mean that that student will have as much aid available for the second, third, and fourth years. Students can "lose" merit aid (if their grades don't meet the minimum level required for a particular scholarship) and even need-based aid (if their families move into a higher income bracket, for instance). In either of these cases, the cost born by students draws closer to the full sticker price.

Finally, the true marginal cost for providing a college education to an additional student is the sticker price, not net price. Even if the student doesn't have to pay the full sticker price, someone else has to pick up the rest of the tab, whether parents, other family members, taxpayers or other third parties. Looking at just net price is misleading because we can't ignore the fact that the tuition bill has to be paid in full. One of the main reasons tuition has skyrocketed in recent decades is that third parties foot so much of the bill. If college is to be made more affordable, the payment structure ought to be restructured so that consumers are more cost-conscious and in a position to spend their dollars elsewhere if colleges and universities fail to control costs.

Of course, this is not to say that looking at net price is totally illegitimate. Indeed, there is a limited usefulness in looking at net tuition, but we have to keep any analysis of net tuition within those limits, recognizing that, when it is all said and done, the full sticker price is in fact paid into the university coffers. Unless we first start with that acknowledgment, any discussion of college costs will go awry.


The Asian of Reason said...

I pay full sticker for tuition at my university, to the tune of 40,000 a year. Doesn't matter, I don't qualify for financial aid, especially as an only child in an upper-middle family.

It wasn't until I arrived at college that I realized that students actually took out loans for college and worried about finances. What a bubble I lived in.


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Jane S. Shaw said...

Jonathan: Thank you for your analysis! I too have been bothered by the blithe acceptance of "net tuition" as a more accurate than sticker price. You gave powerful reasons why relying on net tuition has serious limitations and tends to disguise how severe the tuition hikes have been. Jane S. Shaw