More Than Tuition: Today's Students and Institutional Incentives for Setting Yearly Budgets

Even though the mainstream media likes to focus on the lives of mostly privileged students at expensive and selective residential colleges, most of today’s students experience a very different reality. After all, nearly half of all students attend colleges that don’t offer campus housing. Moreover, many students come from low-income families--an estimated 45 percent of undergraduates in 2012 had household incomes of less than $30,000. (U.S. Department of Education Data, NPSAS 2012.) These same students face an average net price of $8,065 at public two-year colleges and $11,854 at public four-year institutions. In other words, at America’s “most affordable” institutions of higher education, low-income families are expected to pay nearly a third of their annual incomes to attend, putting them in precarious financial positions. Gone are the days when students could call their parents to help them if they fell into financial trouble.

While the lives of students have changed dramatically over the last few decades, the enshrined definition of Cost of Attendance (COA) has not changed much over that period of time. Instead, colleges are left to estimate these expenses for complicated student situations. Having this responsibility could put colleges in a conflicted position, as they have every incentive to make their institutions appear more-affordable than their competitors. In other words, some colleges may be using the COA to downplay the costs of attending their schools, potentially leaving students from low- and middle-income families eligible for less aid than they need to pay their expenses. As a result, these students may have no other choice than to leave the school or work long hours, making it difficult for them to keep up with their classes.

The Changing Demographics of Students:

There are many ways in which COA falls short. In 2012, for example, 88 percent of students lived off campus. (U.S. Department of Education Data, NPSAS 2012.) Estimating housing and food costs for nonresidential students is more difficult than doing so for students who live in residence halls and have meal plans. While these “room and board” costs are relatively well-defined for students living on-campus, those who live on their own have much more flexibility in where they choose to live and who they live with, and will thus also have different--and highly variable--living expenses.  

In addition, more than 30 percent of students attended college part-time, and of those students, approximately half were employed full-time. (U.S. Department of Education Data, NPSAS 2012.) These working students may have already set aside money for their living expenses, but given that their financial aid packages will include the federal loans they are entitled to, they may end up borrowing loans for an expense for which they have already budgeted.

Moreover, students are increasingly attending institutions or using modalities of education that didn’t exist when lawmakers first drafted the COA section of the Higher Education Act in the 1970’s, namely online programs. In the fall of 2012, approximately 8 percent of undergraduates took their classes completely online and nearly a quarter were enrolled in at least one online course. (U.S. Department of Education Data, NPSAS 2012.) But the COA definition has not kept in mind the unique needs of this population and what online attendance may mean for setting yearly budget estimates. For example, since students can attend from anywhere online, there could be large regional variations in cost of living for students enrolled in the same program at the same institution.

It’s clear that students face significant financial barriers to enrolling and staying in college, one of them being the current way COA is constructed. When COA falls short, students might not have access to the aid they need to defray expenses and stay in school. Research from the Wisconsin Hope Lab, a laboratory for translational research aimed at improving equitable outcomes in postsecondary education,  shows, for example, that half of community college students face hunger and 13 percent face homelessness.

Competing Incentives: Setting COA Becomes a Balancing Act for Institutions:

Meanwhile, federal lawmakers, responding to widespread concern about college affordability, have expressed great interest in colleges’ net prices--the price students pay after scholarships and grants are taken into account (COA - grants/scholarships = net price). For example, in 2008 Congress added a requirement that all colleges and universities that participate in the federal student aid programs have a Net Price Calculator on their website that helps students anticipate their financial aid packages. These calculators start with COA and then subtract scholarships and grants that a prospective student may receive according to the financial and academic information the student inputs. Net prices also figure prominently on the U.S. Department of Education’s College Scorecard, a consumer tool that provides useful information to students and families. To make themselves more attractive to prospective students, colleges have a significant interest in appearing to be low cost or lower cost than their peers. So if colleges can tinker with COA to make it lower to begin with, chances are their net price will be lower as a result.

Colleges and universities may have additional incentives for setting artificially low COAs. Schools with high student loan default rates may want to keep federal student loan borrowing at a minimum to avoid sanctions from the federal government, including the possibility of losing their eligibility to award their students federal financial aid. But, as mentioned previously, there are huge problems if an institution sets COA too low--colleges and universities risk creating financial strain for low-income and moderate-income families who rely on accessing aid to help them offset their cost of living while attending school. Research from the Wisconsin Hope Lab showed that one-third of colleges and universities provided cost of living allowances that were at least $3,000 less than estimated living costs for that region.

While colleges must not set their COA too low, they also have to avoid setting it too high. If colleges overestimate students’ living expenses, they may scare prospective students away with the high price tag, even though the COA is only an estimated budget and students can spend less out of pocket depending on their needs. Setting the COA too high also may cause students to max out their loans and take out private loans, and parents to turn to PLUS loans to help fund any difference. This causes intergenerational debt that may be detrimental to the well-being of low-and moderate-income families.

The truth is that Congress has given colleges the nearly-impossible task of trying to get COA right for everyone without creating an individual estimate for each student, which would be tedious, complex, and beyond the capacity of even the most well-resourced institutions. Given the diversity of today’s undergraduates, there is no easy solution for understanding how much an academic year will cost them.

In our next update, we’ll explore in more depth how institutions are grappling with COA, using data and examples to highlight local variation in COA, as well as trends over time. "