Net Price vs. Sticker Price

November 29, 2005

For several years, some experts on college financial aid have sought to change the conversation about college prices, arguing that sky-is-falling rhetoric about skyrocketing tuition exaggerates the extent of the problem. To understand the real pain for students and families, they have argued, "net price" (what colleges charge students to attend minus the amount of financial aid the students receive) provides a clearer picture of what a higher education actually costs -- and tends to make the situation look less dire.

The argument can seem self-serving when it comes from college officials themselves. But a report released Monday by the U.S. Education Department's National Center for Education Statistics generally endorses the view that policy makers should use net prices, not just sticker prices, in assessing students' higher education costs -- and shows that the median net price paid by first-time freshmen from 1999 to 2002 rose at a significantly slower pace than did the median price of attendance for students at all types of institutions.

But that doesn't mean celebration is in order: Even the increases in net prices outpaced inflation during that period, and the picture for students is likely to have worsened in the last few years because the amount of available grant aid has grown at a slower pace than it had previously.

"This is a strong warning that looking only at the published price of tuition creates a panic that is largely unwarranted," said Sandy Baum, an economics professor at Skidmore College and consultant to the College Board. "And it's great if the net price is growing more slowly than the published price. But it is still growing, so let's not be sanguine, because students still have to pay more."

Added Arthur M. Hauptman, a consultant who specializes in higher education finance: "The basic underlying premise is that the increase in aid is not keeping up with the increase in the price."

The NCES report, "Changes in Patterns of Prices and Financial Aid," acknowledges its limitations. It notes, first and foremost, that it focuses on what different types of institutions charge their students, not what different types of students pay. So it doesn't, for instance, provide any sense of whether colleges are treating students from low-income families differently from those with high incomes. The report also focuses on data for full-time, degree seeking freshmen, who represent 87 percent of all students at private nonprofit institutions but only 12 percent of students at public two-year colleges.

The report provides detailed information on four major sectors of higher education: public four year, private nonprofit four year, public two year, and for-profit less than four year institutions. In all cases, the median increase in net price (including grants but not loans) was smaller than the median increase in the price of attendance.

But for all sectors other than public community colleges, the report found, the three-year increase in net price exceeded inflation for the period, by 2.8 percent for four-year publics, 3.2 percent at for-profit colleges, and 4.4 percent at four-year private institutions. The increase at two-year public institutions trailed inflation by 1.3 percent over the period.

Among other findings:

  • In all sectors, institutions that charged tuitions higher than the median tended to have seen larger increases in net prices than institutions at the median.
  • In all sectors, net prices appeared to increase less at colleges that had a higher proportion of students receiving federal aid than those that had fewer students receiving such aid. That could provide evidence countering the suggestion that the awarding of federal aid leads to increases in tuition.
  • At private nonprofit colleges, "very selective" institutions increased their net prices at rates greater than institutions at the median.

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