How to Calculate–and Not Calculate–Net Prices

Colleges’ net prices, which the U.S. Department of Education defines as the total cost of attendance (tuition and fees, room and board, books and supplies, and other living expenses) less all grant and scholarship aid, have received a lot of attention in the last few years. All colleges are required by the Higher Education Opportunity Act to have a net price calculator on their website, where students can get an estimate of their net price by inputting financial and academic information. Net prices are also used for accountability purposes, including in the Washington Monthly college rankings that I compile, and are likely to be included in the Obama Administration’s Postsecondary Institution Ratings System (PIRS) that could be released in the next several weeks.

Two recently released reports have looked at the net price of attendance, but only one of them is useful to either researchers or families considering colleges. A new Brookings working paper by Phillip Levine makes a good contribution to the net price discussion by making a case for using the median net price (instead of the average) for both consumer information and accountability purposes. He uses data from Wellesley College’s net price calculator to show that the median low-income student faces a net price well below the listed average net price. The reason why the average is higher than the median at Wellesley is because a small number of low-income students pay a high net price, while a much larger number of students pay a relatively low price. The outlying values for a small number of students bring up the average value.

I used data from the 2011-12 National Postsecondary Student Aid Study, a nationally-representative sample of undergraduate students, to compare the average and median net prices for dependent and independent students by family income quartile. The results are below:

Comparing average and median net prices by family income quartile.
	Average	10th %ile	25th %ile	Median		75th %ile		90th %ile
Dependent students: Parents’ income ($1,000s)
<30	10,299	2,500	4,392	8,113		13,688		20,734
30-64	13,130	3,699	6,328	11,077		17,708		24,750
65-105	16,404	4,383	8,178	14,419		21,839		30,174
106+	20,388	4,753	9,860	18,420		27,122		39,656
Independent students: student and spouse’s income ($1,000s)
<7	10,972	3,238	5,000	8,889		14,385		22,219
7-19	11,114	3,475	5,252	9,068		14,721		22,320
20-41	10,823	3,426	4,713	8,744		14,362		21,996
42+	10,193	3,196	4,475	7,931		13,557		20,795
SOURCE: National Postsecondary Student Aid Study 2011-12.

 

Across all family income quartiles for both dependent and independent students, the average net price is higher than the median net price. About 60% of students pay a net price at or below the average net price reported to IPEDS, suggesting that switching to reporting the median net price might improve the quality of available information.

The second report was the annual Trends in College Pricing report, published by the College Board. The conclusion the report reached was that net prices are modest and have actually decreased several years during the last decade. However, their definition of “net price” suffers from two fatal flaws:

(1) “Net price” doesn’t include all cost of attendance components. They publicize a “net tuition” measure and a “net tuition, fees, room and board” measure, but the cost of attendance also includes books and supplies as well as other living expenses such as transportation, personal care, and a small entertainment allowance. (For more on living costs, see this new working paper on living costs I’ve got out with Braden Hosch of Stony Brook and Sara Goldrick-Rab of Wisconsin.) This understates what students and their families should actually expect to pay for college, although living costs can vary across individuals.

(2) Tax credits are included with grant aid in their “net price” definition. Students and their families do not receive the tax credit until they file their taxes in the following year, meaning that costs incurred in August may be partially reimbursed the following spring. That does little to help families pay for college upfront, when the money is actually needed. Additionally, not all families that qualify for education tax credits actually claim them. In this New America Foundation blog post, Stephen Burd notes that about 25% of families don’t claim tax credits—and this takeup rate is likely lower among lower-income families.

Sadly, the College Board report has gotten a lot of attention in spite of its inaccurate net price definitions. I would like to see a robust discussion about the important Brookings paper and how we can work to improve net price data—with the correct definition used.