Today's college prices can easily cause sticker shock. Annual published tuition at top-ranked institutions regularly tops $55,000, and it's not unusual for public flagships to list out-of-state undergraduate tuition at $25,000 or more.
Those are eye-popping numbers when median U.S. household income is less than $68,000 and families need to pay for non-college expenses. Yet only the wealthiest students pay these sticker prices, as many institutions offer hefty unfunded financial aid packages in a practice called tuition discounting. But few students and their families know how much college will actually cost them when they apply, leading some to forgo applying to institutions that they may be able to afford.
Phillip Levine, an economics professor at Wellesley College, argues that the opacity of college pricing hurts both families and institutions in his new book, "A Problem of Fit."
Ideally, students would go to the institutions that are the best fit for them, Levine said.
"Some people are good fits for Ohio State or four-year public institutions. Some students are great fits for community colleges," Levine said. "But if the reason why all the people are falling into the categories that they're in is because of pricing and a misunderstanding of pricing, that's a problem."
Institutions also aren't happy with this system. Top-ranked private colleges worry they aren't enrolling enough low-income students, while their less-selective counterparts are forced to offer merit aid to attract students. Public institutions worry that they're missing out on students who are going to community colleges. And two-year schools are concerned about the prospective students who are thinking about forgoing college altogether because of the perceived costs.
"There are all these misallocations of students," Levine said.
Higher Ed Dive spoke to Levine about what prompted the book, what he learned while researching college pricing and what can be done to improve the system.
This interview has been edited for clarity and brevity.
HIGHER ED DIVE: Was it your own personal experiences that drove you to write this book?
PHILLIP LEVINE: A little bit. I'm an economist — I make a pretty good living — and I've been saving for college since the day that my kids were born. But as they were getting to be about 12, 13, 14, I just wanted to know whether I had saved enough money, and that required knowing what college was really going to cost me.
I wanted to know whether I was eligible for financial aid, and I realized that essentially that was an impossible question to answer. That's what started a very long process for me. I realized that if this was a problem for me it has to be a problem for other people. I have a Ph.D. in economics. I'm really good at working with numbers and figuring things out, and I couldn't figure it out.
What are some of the most common ways institutions are making that information difficult to understand?
The system itself makes it difficult for families to understand. The only number the federal government requires institutions to report is something called the cost of attendance, which is the full level of tuition, plus room and board and assumed values of other expenses — the toothpaste, the books and stuff like that.
It's just that the vast majority of students don't pay that price. The way that I like to think about it is that it's the maximum cost of attendance. On a public university's website, $30,000 is not an uncommon number. For the private elite institution, $80,000 is not an uncommon number. Most students aren't paying those amounts, yet that's the number everybody has in their head.
There's been some recognition that that's a problem. In 2008, there was an amendment passed to the Higher Education Act that required all colleges and universities to institute net price calculators. It's a tool designed to help you figure out what college will cost, given your circumstances, and that's great.
It is a very well-intended intervention that just in practice didn't work out very well. These tools typically require people to enter information that's hard for them to enter. They ask you about your tax information. People don't like taxes. As soon as you start asking them about taxes, you lose them, so these tools tend not to be terribly successful.
Who do these issues affect the most?
Clearly, this is more of a problem for lower-income students who think what might be the cheapest option isn't the cheapest option. Or who think something they can afford is something they can't afford.
Maybe there are just affordability issues anyway. One of the things I document in the book is that even if you have perfect information, there are plenty of instances in which college is still unaffordable for you.
If a student's family can pay barely anything to send their kids to school, we can't make those families pay $15,000 a year. That doesn't work. That $15,000 partly includes loans and work-study, but there's still a cash component — how much are you supposed to write a check for? Most institutions charge that family a number like $5,000.
How are they supposed to come up with that?
Some experts have told me that students are sensitive to larger merit aid packages, giving the institutions an incentive to keep prices where they are. What's your take on that?
If you're Harvard and Yale, you don't need to offer merit aid because you can charge as much as you want. Those institutions have tremendous market power. That's great for them because higher-income students pay those larger amounts, which provides greater revenue for the university to provide financial aid for the students who can't afford it. They also have very large endowments. The financial aid system works the best at that level of institution because they have just enough money in the system to make it work.
Public institutions can't charge $80,000 because there are laws preventing them from doing that. The state sets tuition and they're going to pick a number like $30,000. Higher-income students, who may be able to afford more than that, aren't required to pay more. Those students are the most strongly subsidized by the system. That restricts revenue at those institutions. And then because there's not enough direct state aid, those institutions don't have enough money to provide sufficient financial aid for lower-income students. That's why they charge lower-income students as much as they do.
Then you get to the other schools — private schools that don't have large endowments or tremendous market power. You can't charge $80,000 because nobody's going to come. Maybe $60,000 or $70,0000. That's still too much, so they are forced to offer merit aid to basically all their students. Once one school does, all schools have to do that. It doesn't end up changing who goes where because everybody's making the same discounting awards. But it does reduce revenue for the institution. And that, again, makes it hard for the institutions to provide enough financial aid for lower-income students.
You argue the solution to these issues is more sources of funding. What are they?
The institutions that have tremendous amounts of resources are making the financial aid system as generous as it possibly could be to overcome those problems. Williams College just announced a grant-only financial aid system, for example. Most schools aren't at that level — they don't have the resources — and the competition between them prevents them from generating enough revenue to lower the price enough for lower-income students.
The money is going to have to come from the government. My preferred solution to get over this problem is doubling the Pell Grant. That provides exactly the right amount of money to fill in the gap to cover the expenses that lower-income families can't otherwise afford.