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November 27, 2012 4:50 PM The Net Price Problem

By Daniel Luzer

The proliferation of complicated financial aid policies in the last 20 years has lead policymakers to concentrate on one particular number in college pricing: average net price, not what a college says it costs, but what the average student pays, after accounting for grants.

This focus makes sense; we use this particular measure in attempting to calculate the affordability of college in our annual college rankings. But a common theme of net price discussion is that, while sticker price might be sky rocking to higher and higher levels every year, net price is actually lower.

This is only part of the story, argues Kevin Carey in a recent piece for the Chronicle of Higher Education. Net price might be relatively stable, but the real cost of college, per pupil spending, continues to increase. As he explains:

Most colleges are nonprofit and spend all the money they get, so there are three big numbers to watch here: (1) how much colleges spend per student; (2) how much money comes into the system from sources other than students; and (3) how much students and their families pay out of pocket. Colleges prefer to ignore (1) as a contributing factor to unaffordability and focus on the broadly correct argument that (2) and (3) vary inversely: If state subsidies decline or endowments take a hit, then student charges must rise in order to maintain spending. Similarly, if Pell Grants go up, then students pay less out of pocket.
That’s all generally true. But ignore (1) at your peril because college spending is the driving force behind affordability or lack thereof in the long run. External subsidies and student charges are both limited in how much they can increase over time by a combination of overall growth in economic output (particularly as it’s distributed among families of college-age students) and the political economy of government fiscal policy.

The real college costs, however, have be paid by someone. And real college costs keep going up. What colleges spend per student is actually the more important number here, because that impacts what college is likely to cost in the future. The spending per student depends on both real tuition and money from “other sources.” In the case of state colleges, which the vast majority of college students attend, those other sources are state appropriations and endowment money. And both of those funding lines are declining, largely for the same reason: the sluggish economy.

To be sure, many universities discount heavily but, as Karey points out, over time institutional spending per student, like college sticker price, is also rising. As this report from the American Institutes for Research demonstrates, real spending on education “continued to rise from 2000 to 2010, even after accounting for a huge influx of new students, inflation, and the revenue shock of the Great Recession.”

What this suggests is that net price doesn’t fully explain the real trends in education pricing. As long as colleges continue to spend more to educate each student, the real cost of college is going to increase, maybe not as dramatically as sticker price, but soon, and probably dramatically. As Carey writes:

The recent stability of average net prices is mostly a function of three temporary phenomena that cannot, under any likely scenario, continue to offset increased college spending in the long run. They are: price discrimination, federal tax policy, and Pell Grants.

And all of these phenomena, Carey argues, are synthetic, temporary funding measures. Over the long term as long as colleges continue to spend more, college is just going to cost more.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer