Net Price Calculators: Wins and Warnings
It’s no secret that the cost of a college degree has risen dramatically through the years, often making the dream of a college education appear completely out of reach. The average family will spend, or obligate themselves to spend, more money than any other time in their lives, all in a span of a few short years. Many families desperate to help their children are sacrificing their own financial futures and amassing huge debt loads, all in an effort to provide the opportunities a college degree affords.
Families of college-bound students engaged in the various stages of the college planning process are assaulted with a barrage of facts, figures and common assumptions from websites, school officials, industry experts, co-workers, friends and neighbors. All too often, they have no idea how to interpret and apply this data, nor do they know if the data represented is even factual in nature. These families are then left to make financial decisions they aren’t properly prepared to make, and as a result, they spend more on college than they should. Families need an accurate, transparent place to get the hard numbers required to make informed college planning decisions.
In an attempt to address this need, the Higher Education Opportunity Act of 2008 (Public Law 110-315) authorized legislation whereby every institution administering federal student assistance will be required to provide basic information regarding the cost of college for the proposed student. The result is the Net Price Calculator (NPC), which lawmakers hope will provide more transparent and accurate information related to the actual cost of college, based on a particular student’s characteristics and the tendencies of the selected school. The NPC’s are great tools to show families that the school’s “Sticker Price” is not necessarily the bottom line number. Using each school’s financial award history, the tool is designed to show a family how much money they may have to pay out of pocket, how much they might defer via student loans, and how much “free money” could be awarded by way of scholarships and grants. This is a far cry from the past, when families had just assumed their child would not qualify for scholarships or grants, and therefore did not even apply for financial aid. Those families paid the full “Sticker Price” out of pocket, unnecessarily.
These Net Price Calculators, which were due in place at all above-referenced institutions by October 29th, 2011, are a very important first step towards providing the help families need to successfully navigate the process of paying for college. Just like any other tool, however, there are limitations for families to consider---and it is vital that families use the NPC’s only for their designed purpose. For example, the NPC’s were not designed to be used for budgeting purposes, school selection, school cost comparisons, as a cost reduction tool, or as a tool to identify the right college based on the student’s desired major, career objectives, academic qualifications, etc. Below are outlined several of the limitations of the new NPC tool, as well as the potential impact for the families using it in their college planning process.
There is no standardized format in place. Schools have the ability to choose among several different formats for the NPC they will use. Due to the fact that each calculator may ask a different number of questions of varying complexity, this inconsistency in format also leaves the door open for a huge variance in accuracy of results. These are the three options from which schools can choose. First, there’s the federal format, which asks only six questions: one financial question and no merit aid questions. Second is the option of subscribing to a service offered by a third-party vendor, where no specific format is mandated. Finally, schools may create and implement their own NPC, for which there is, again, no established format. As a general rule, accuracy of results will work as a function of the complexity of the calculator. The more simple the NPC, the less accurate the results, and vice-versa. The takeaway here is that parents and students cannot expect uniform results among calculators as diverse as the students themselves.
Families aren’t easily able to compare multiple schools at once. This is a side effect of the lack of a standardized format. For example, if a family is looking at several different schools which each employ a different version of the NPC, this family will not be able to fairly compare their proposed net price from one school to the next. Some schools reduce scholarships and work-study income from the net price, and others do not. What’s more, schools may include scholarships in their NPC calculations that may not be included in another school’s NPC calculation. As a result of this discrepancy, a family may make a costly assumption that one school is less expensive than another, when, in fact, this may not be the case at all. This assumption could cost the family a great deal of money over the course of a four-year degree. It is imperative that users fully understand, in detail, what each school includes in their NPC if they are going to use this as a school comparison tool.
There’s more to consider than cost of attendance per year. The old saying “you can’t judge a book by its cover” rings true here. There are a number of other factors that must be taken into consideration when attempting to calculate how much you will pay for school. Let’s look at inflation, graduation rates and freshman return rates to put this in perspective.
Inflation calculations will not be required until 2014, according to the Higher Education Act of 2008. How does this impact you? Cost of Attendance (COA), which is comprised of college tuition, books, fees, and room and board, has risen by some accounts at a rate of 4.1% per year over the last 10 years (1). This increase is significant when we’re talking about the next four years. For example, if the COA is $20,000 for a particular school and your child is a senior in high school, you would assume a college degree would total $80,000 ($20,000 times 4 years of college). However, when you factor in the average public school’s rate of inflation of 4.1%, your costs would rise to $20,820, $21,674, $22,562 and $23,487 respectively for the freshman, sophomore, junior and senior years of college. That totals $88,543 versus your original budget of $80,000, a difference of $8,543.
Next, in considering four-year graduation rates, what if it takes five years for your student to graduate instead of four years as originally planned? Add on 4.1% inflation to the senior year cost of $23,487, and you now have a fifth year cost of $24,450. Your new total cost for this 4 year degree is a whopping $112,993! You originally planned for $80,000 and now you are on the hook for an additional $32,993, a 41.2% increase over your original budget! Ouch!
Lastly, let’s consider freshman return rates, defined as the percentage of students who return to the school where they began. If for whatever reason your student doesn’t want to (or can’t) stay at the school where they started, how will this complicate things? Return rates are important to consider, as the student will have to retake any courses that do not transfer to the new school. The re-taking of non-transferrable classes will extend the student’s amount of time in school. Due to inflation (see above example), each subsequent year in college is more expensive than the previous year, and, as such, your budget may not survive.
NPC’s don’t address ways to lower EFC. EFC, or Expected Family Contribution, is a number that comes from the Student Aid Report which follows the submission of the FAFSA (Free Application for Federal Student Aid). This EFC number is the amount a family is expected to contribute per year to their child’s college education and it has a profound impact on the family’s out of pocket cost for college. EFC is based on the parent’s income, the parent’s assets, the student’s income and assets, how many students there are, the age of the parents and how many are in the family. By understanding how each of these factors contributes to the final determination of EFC, it is possible to make adjustments and tweaks among these components and lower the family’s number. This, in turn, can help lower the actual cost of college for the family. When families are unaware of the possibility of lowering EFC, families may once again look at a high level number and make a costly assumption about the affordability of a particular college or university.
NPC’s don’t adjust for “non-typical” families. For the family with two married parents and rather simple finances, the calculators are predicted to be fairly accurate. However, when you consider more complicated financial situations, such as those involving divorced parents, the calculators are not as likely to take into account all of the nuances that can impact a financial aid package. For instance, colleges may vary greatly on their treatment of assets from divorced parents. This variance in the treatment of assets represents another opportunity for families to make costly assumptions based on incomplete or flawed data.
The bottom line is this: a college education is more of a necessity now than ever before for those hoping to compete in today’s marketplace. For families wanting to help ensure their child’s ability to attend college and earn a degree, figuring out just what price tag is attached has proven to be a very frustrating, and often confusing, task. Whereas NPC’s are certainly not a magic potion, they do represent a very important first step towards providing parents and students the clarity needed to make informed decisions about the process of paying for college.
That said, this new tool has a long way to go and simply cannot take the place of working with the guidance staff, college officials and other professionals trained to guide you safely through the maze that has become the college planning process. Mark Kantrowitz, publisher of Finaid.org (which tracks the financial aid industry), perhaps says it best: “These calculators are good for determining whether a school is inside or outside the ballpark, but not distinguishing between home plate and centerfield.” All we can hope is that future versions of the NPC’s will offer more precise findings leading to more accurate comparisons and more informed decisions for families with college-bound students.