Digging Deeper: That Elusive "Net Cost of College"
Did your roommate get a better deal than you did?
Ron Lieber, who writes the Your Money column of the New York Times, returned to the topic of college costs for the third time in less than a year. Why It’s So Hard To Calculate What You’ll Pay For College takes a closer look at how four highly selective institutions in Massachusetts deal with merit aid (read discounting). Yes, there is a shadow financial aid system known as “merit aid,” which is a form of discounting that has little to do with your finances.
It is well timed, as college applications are in, and even the students who have received early admission notification are still awaiting information on their financial aid.
Let’s review the types of aid before we get too far:
- Need-based aid – may include scholarships, grants, work-study funds and LOANS! Yes, loans get lumped into the "financial aid" bucket so read your financial aid award letter closely! (To read more on this topic, you might want to check out an article I wrote for CentSai.com.) Even for institutions that claim to meet 100% of need, some proportion of the award is likely to be something you have to earn or pay back.
- Merit aid – scholarships and grants that do not need to be paid back based on student’s particular abilities or talent.
Note: Any grant/scholarship aid received beyond tuition and fees (if you get a “free-ride” including room and board) is taxable income!!!
Once you have been through the process of applying for financial aid, you quickly learn if an institution is need-blind and if they meet 100% of need. The FAFSA has been submitted and you know your Expected Family Contribution, but how can you familiarize yourself with the institutions’ merit aid policy?
The process by which these institutions determine who gets merit aid and how much is awarded is not at all transparent. It “shadows” the traditional need-based financial aid system, and is as mysterious and is not subject to rules and regulations, much as shadow banking compares to traditional banking. But there is definitely money out there:
And by the 2016-17 school year, the 411 private nonprofit schools that the National Association of College and University Business Officers surveyed were reporting an average discount rate of 49 percent for first-time, full-time students. So almost half of every dollar in gross tuition revenue from first-year students was used for grants to reduce the cost.
Discounting is not a term we hear often in the tuition discussion. You don’t think about higher education as a regular consumer product. It might be useful to draw an analogy with airline tickets: everyone on the plane, like everyone in college may be paying a different price, but unlike airlines where you pay based on the timing of when you buy the ticket (and where you sit on the plane) it's still a black box for colleges.
The merit-aid pool is finite, as is the pool of qualified students. When more is given to one student, it is not available to another who might be more worthy (but willing to pay more perhaps), or to someone who may be more in need. Institutions are competing for students, and merit aid is one of the weapons used in this battle to get those classes filled from the finite pool of students. A student may not need more money to afford to attend a particular school, but offering some merit aid may clinch the deal. According to the article, some of the most prestigious schools, like Wellesley, don’t need to play in this merit aid game to fill their rosters.
There are tools out there that might help with your research. Each institution must make information available as to the retail ("sticker") and average net cost of attendance (by income level), graduation and retention rates, and more. If there is a large difference between the retail and net cost, it might be an indication that merit aid is possible. Where to find this information? Each institution’s information is available through the National Center for Education Statistics navigator site [NGPF Activity below has students pull the sticker and net prices from this website] . You can also search the college website for any clues to merit aid awards.
Institutions are also required by the department of Education to provide a Net Cost Calculator. The Calculator takes you to the individual institution’s calculator page. You basically enter all of the same information provided for the FAFSA, plus other descriptive information, and you will get an estimate based on your financial information and the institution’s policies. Given the size of the investment you are about to make in higher education, it is certainly worth the time to check it out for the institutions to which you have or will apply. And don’t be shy about asking for more from an institution, especially if you have received a better deal from another school.
Is the system rigged? An opinion piece from the Wall Street Journal this week discusses the Department of Justice investigation into whether or not colleges and universities are colluding (they do act like a cartel) and makes some interesting points. Would students be better or worse off if colleges ignored the accepted code of conduct?
Don’t forget that NGPF has lots of relevant activities related to the topic:
If you are looking for the Question of the Day, we ran two yesterday:
About the Author
Beth Tallman entered the working world armed with an M.B.A. in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducting student workshops, and developing finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.
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