College tuition is out of control — or is it?

at 11:09 AM ET, 05/25/2012

We’ve pointed out before that, since 1978, the cost of a four-year education from a public university has been rising much, much faster than even health care costs. That’s a staggeringly steep rise.

But over at NPR’s Planet Money, Jacob Goldstein notes that these tuition figures can be a tad misleading. The “sticker price” of college has been rising at a frantic rate, true. But we should also consider the “net price” which is what students actually pay after factoring in grants and scholarships*. Those grants and scholarships have also been increasing dramatically. Which means the net price that the average student pays for college has been growing much more slowly:


Prices do not include room and board. Numbers are adjusted for inflation in constant 2011 dollars. (Lam Thuy Vo / NPR, Source: College Board)

Now, these are averages, so they can obscure a lot of variation, but there are some interesting tidbits in here. The average “net price” for tuition at a four-year private college actually fell slightly since 2006. The net price of a public school has ticked up in the same time frame, though not by nearly as much as the sticker price that’s been getting all the headlines. (Do note that the prices for public schools are only for in-state tuition — here’s the College Board source data.)

So why do universities do things this way? For one, some students still pay the full price for college. There are plenty of elite schools with such high demand that they can get away with charging the full $50,000 or so to families that can afford it and then offer up scholarships to low- and middle-income students. It’s a form of price discrimination, allowing schools to tailor their prices to different customers.

What’s interesting, however, is that many schools are now posting high sticker prices and then giving scholarships to just about everyone, according to US News. Essentially, these schools are like car dealerships — nobody actually pays the posted price.

So why don’t these schools just knock the sticker price down to reflect what people end up paying anyway? Wouldn’t that be more transparent? Perhaps, although one theory is that schools are worried that lowering their posted prices would signal a low-quality education to students and families. So they keep raising their sticker price even while doling out more scholarships and financial aid.

Yet there’s a real cost to this sort of soft deception. Thanks to a 2008 law, colleges are now required to put a “net price calculator” on their site that lets students enter their financial information and figure out the amount of tuition they’ll actually pay. But it’s not clear that everyone has caught on. A recent study by Andrew Kelly of the American Enterprise Institute found that six out of 10 families rule out certain colleges and universities because of the sticker price. They don’t realize that the “net price” is often far lower. Which means there are many students passing up colleges that they could probably afford, deterred by the sticker shock.

* Update: As commenters point out, these grants and scholarships also include federal aid such as federal Pell Grants (which are now worth up to $5,500 and represent a cost to taxpayers). Unfortunately, the College Board doesn’t break down what percentage of aid comes from the government and what portion from the schools themselves.

 
Read what others are saying

    Most Read: Business

    DJIA
    -1.95%
    NASDAQ
    -1.75%
     Last Update: 11:47 AM 01/27/2015(NASDAQ&DJIA) |

    World Markets from      

     

    Other Market Data from      

     

    Key Rates from