The chart I shared last week illustrating just how much the nation’s declining income levels have contributed to the rising cost of college for the average family prompted plenty of comments about the value of a college degree. As I expected, I also heard from several higher education experts who asked why I used the “sticker price” of college in the chart to represent tuition levels.
A college’s sticker price is like the sticker on the window of a new car: It’s the advertised price, but most people pay a lower, discounted figure. Just how much lower depends on a variety of factors. Sitting in a college classroom is similar to sitting on a plane — you have no idea how much the person next to you paid for their seat.
The discounted tuition rate is known as the “net price.” It’s what students pay out of pocket, or more likely what they need to borrow after scholarships are deducted from the total cost of college, including books, fees, and room and board. The U.S. Education Department’s College Scorecard and College Navigator list average net prices for individual colleges, as well as the net price by a family’s income level.
I used the higher sticker price in the chart for two reasons. For one, families still pay attention to the sticker price, and it often drives decisions about where to apply to college. “Sticker price is still important to highlight because there is a group of students who rule out colleges just based on the sticker,” said Robert Kelchen, an assistant professor of higher education at Seton Hall University.
Second, the net prices of colleges differ widely by type of institution (public vs. private, for example) and by income level. The College Board publishes average net prices for different types of schools every year, but even those figures are subject to debate because they count tax credits as financial assistance and exclude books and other expenses.
While net prices might make higher education seem less expensive when compared to sticker prices, family incomes are not even keeping pace with discounted prices.
An analysis by Kelchen of the relationship between net price and family income shows that one out of every five families in the U.S. pays 100 percent or more of their annual income to cover the net price of college. Obviously, these families don’t spend every dollar of their paycheck on tuition, so they borrow or use savings to pay tuition bills. But the bottom line is that even discounted tuition rates are expensive for a broad cross-section of Americans struggling to keep up.
Comparing college prices with family income is critical given current debate in the U.S. about income inequality. If one vehicle to reverse that trend is to encourage more people to acquire a credential after high school, then it’s important to know how affordable degrees are to average Americans.
It’s not only which tuition price is used to make that determination (sticker vs. net), but the earnings data used also matters, according to Beth Akers, a fellow with the Brown Center on Education Policy at the Brookings Institution. Tuition levels should be compared against the future earnings of college graduates, Akers told me, since few families pay tuition bills out of their regular paychecks.
“It’s not a problem if you borrow every single penny to pay for college as long as there is a financial payoff afterwards,” Akers said.
Those financial rewards, of course, vary and depend on the type of degree earned and even a student’s major in college. Not all colleges or degrees are created equal.
One final thought about measuring college affordability: Higher education’s financial model is highly dependent on some share of students and their families paying the full sticker price of college. Full-pay students — or those who pay the bulk of the tuition bill — are essential on campuses because they provide the revenue that subsidizes their classmates getting a discount.
This financial scheme has worked well for colleges for decades, but there is evidence that there are fewer students willing to pay the sticker prices of some colleges. Unlike on a plane, where paying more will get you a better seat or bump you up to First Class, students who pay more at a college get the same product as classmates paying a discounted price.
Eventually, as fewer people pay the sticker price of a college, the very definition of it will lose all meaning. After all, if everyone is getting a deal on tuition, is anyone actually getting a deal?