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How Average Net Price Fails to Capture the ‘Best Bang’ for Your Buck

02/25/2014

The Chronicle of Higher Education. Feb 21, 2014.

This is the second in a series of posts about the data that are likely to appear in the Obama administration’s proposed college-ratings system. For the first post, about graduation rates, click here.

Search for a college on the White House’s College Scorecard, and the first number you’ll see is the institution’s average net price, under a gauge that shows whether the number is low, medium, or high in relation to other colleges.

The scorecard was supposed to be a source for prospective students to “compare schools based on a simple criteria—where you can get the most bang for your educational buck,” according to President Obama, who introduced it in his 2013 State of the Union address.

But that criterion turns out to be anything but simple. And some higher-education experts at a recent symposium on the president’s proposed college-ratings system called into question the value of average net price as a gauge of college cost in either a consumer-information tool or an accountability measure.

An Alternative to ‘Sticker Price’

Average net price entered the higher-education lexicon in the Higher Educational Opportunity Act of 2008, which required the Education Department to include in its annual data collection a measure of colleges’ average cost of attendance after taking into consideration grant aid.

Congress even gave the Education Department a formula for calculating that figure: Average net price would equal the total cost of attendance—tuition and fees, books and supplies, and room and board—minus the average amount of need-based and merit-based grant aid for first-time, full-time students who receive financial aid.

“Net price was seen as a really great solution because sticker price is very intimidating, especially for low-income students,” says Carrie Warick, director of partnerships and policy at the National College Access Network, an alliance of education, government, nonprofit, civic, and other groups. “This was a big win for consumers in 2008.”

But as a consumer tool, average net price can be just as problematic as sticker price because few students actually pay it.

“We’re now seeing the big limitations of average net price,” Ms. Warick says. “Low-income students will most likely pay much less than the average net price. High-income students will pay much more than the average net price.”

Experts often compare the cost of college to the price of an airplane ticket. Two students sitting next to each other in class might be paying very different amounts for the same education, just as neighboring passengers on an airplane have often paid different prices for their seats.

To deal with such variations in cost, the 2008 law also required colleges to post on their websites net-price calculators, which would allow students to enter their personal financial information and get an individualized estimate of the actual price they would pay at that college.

But while net-price calculators might be valuable consumer tools, individualized data are much less useful as an accountability metric, experts say.

Net Price by Income Quintile

If average net price is too imprecise, and individualized net price too specific, there’s a third net-price calculation that might satisfy the Goldilocks of college-cost metrics: net price by income.

The Education Department collects net-price information for students in five income groups, or quintiles, another requirement of the 2008 law.

Some experts suggest that those numbers, which are more precise than overall average net price, could be used for the new ratings system. In fact, some college rankings already use net price by income to determine which colleges give students the best bang for their educational buck.

Washington Monthly’“Best Bang for the Buck” rankings use average net price for the three lowest income quintiles, which include students whose family income is $75,000 per year or less.

“We think it does a better job reflecting more students with need and not just the very lowest income students,” says Robert J. Kelchen, an assistant professor of education leadership, management, and policy at Seton Hall University who created the rankings forWashington Monthly.

But, Mr. Kelchen admits, it’s still not a perfect measure. For one thing, it’s still “just the average, and the broader the income category you make it, really the less accurate your average is,” he says.

But there are also questions about who is included in net-price-by-income calculations. None of the net-price figures includes part-time students, who can make up a large percentage of the student body at some institutions.

The net-price-by-income calculations also tend to distort the costs for higher-income brackets downwardly. That’s because the calculations are based only on students who receive Title IV federal student aid, but relatively few students in those income brackets actually get such aid. As such, the net-price figures exclude students who may be paying much closer to the sticker price.

Another problem is that average net price by income is calculated by using the number of students in each income quintile who receive any Title IV aid, a group that can include students who get only Federal Work-Study, subsidized Stafford loans, or other aid that needs to be repaid. But nongrant aid isn’t included in the total aid calculation, so the average amount of grant aid per student could appear to be higher than it actually is for some of the lower-income quintiles.

In 2010, two years after net price was introduced, experts encouraged the department to calculate an additional net-price-by-income figure that considered only students who receive Title IV grant aid. But that recommendation has not yet been adopted—and it might end up further complicating the net-price picture.

“The problem with that is that you’re showing five, six, seven measures to students, and that’s a lot of information for them to try to comprehend,” Mr. Kelchen says. “One of the goals of the ratings system needs to be creating something that is simple and easy to understand. If you include too many measures, you’re going against that goal.”

Cost-of-Living Inconsistencies

Most problems with net price center on the aid part of the equation: Which measures of financial aid—and which students—do you include in the calculation of overall average grant aid?

But there are also problems with the total-cost-of-attendance part of the equation, according to Braden J. Hosch, a former director of policy and research for the Connecticut Board of Regents for Higher Education.

Mr. Hosch has found wide inconsistencies in how colleges calculate cost-of-living expenses, especially for students living off campus. There is little federal guidance about how colleges should calculate the cost of living, so they often end up with quite different results. For example, four Connecticut colleges within a two-mile radius had drastically different estimates of the cost of living off campus in 2011-12, ranging from $8,000 per year to more than $20,000.

“When you then take a look at how this calculates into net price, especially at institutions that have very low tuition, like two-year public colleges, you find that these components are actually bigger than tuition and fee costs,” says Mr. Hosch, who is now vice president for institutional research, planning, and effectiveness at the State University of New York’s Stony Brook campus.

Those discrepancies can affect net price by income just as much as the overall average net price, Mr. Hosch says.

Can a Ratings System Accomplish 2 Goals?

Under the 2008 law, the original goal of gathering net-price calculations was twofold. First, net price would be included in College Navigator, the Education Department’s consumer-information site, to provide a better estimate of cost for prospective students. And second, it would be factored into new College Affordability and Transparency Lists, which would be used to hold the most expensive colleges accountable.

Accountability and cost transparency are also objectives for the new college-ratings system, but experts at the symposium suggested it might be better to keep them separate if the Obama administration wants the ratings system to accomplish either goal. Average net price might be best from an accountability standpoint; net price by income or individualized net-price calculations might be better to help students estimate their actual college costs.

“These might be different objectives,” Mr. Hosch says, “and a single solution might not solve the consumer-information needs and the accountability needs.”

In our next post, we’ll explore postgraduate wages and the battle over how—and whether—wage data should be used as a measure of institutional effectiveness.