Should colleges break up the “total cost of attendance,” monopoly?
Part two in a 3-part series originally presented as a report written for the Manhattan Institute
One of the biggest hurdles to completing a college degree in America today is simply figuring out how to pay for it. Last year I wrote a report for the Manhattan Institute around how small shifts alone in the way cost and pricing data gets conveyed to students and families can produce better enrollment and completion outcomes. I’m revisiting these ideas now, updating them, and posting them one at a time here on Medium.
Two weeks ago, I published the first piece on why students would benefit from institutions charging a one-time, all-in upfront fee for a degree, rather than repeatedly financing an uncertain number of yearly increments.
In this second part, I suggest that students and families would be better served by abandoning the concept of a “total cost of attendance,” and instead separate the cost of the degree itself from the supporting expenses — like housing, food and transportation costs — in the shopping, buying and repaying phases of paying for a college degree.
When tallying the cost of a college education, it isn’t just annual tuition that adds up. Students and their families often spend money (usually through loans) to cover things that have nothing to do with the actual learning, but instead free students from having to work to support basic living needs like room, board, and transportation so they can learn.
Not every student necessarily needs money to support these “indirect” expenses. More students today are older and more are likely to be employed. They often own their own transportation and have spouses who share in financial support. And even where consumers don’t have such flexibility, literally hundreds of colleges market weekend and evening programs designed specifically to ensure that working and commuting students can do both at the same time.
Should, for example, a student enrolled in a fully online program be eligible to borrow for costs designed to specifically cover a commute back and forth to campus? If a student lives with her parents, should she be offered a loan that covers non-existent room and board?
In both instances a case can be made for, “probably” and, “probably not,” but federal aid policy does not make these distinctions. Loan and grant aid to cover the combination of tuition and living costs co-mingles the financing of the two.
Not only that, the clumping of these two very distinct expenses happens throughout the financing process. The landing page for any school on the US Department of Education’s College Scorecard website, for example, only lists a net annual cost covering both tuition and living expenses, and even when you drill down into the actual cost subsection the only breakdown one finds what families from different incomes are likely to pay.
Once students find a school, the financial aid award notifications they receive may well detail education fees and living expenses when calculating the total cost of attendance. However, when the funding options to pay these costs get presented, they only match to the total cost rather than the individual components. If you want an unsubsidized federal student loan, you can’t decide how much of it goes towards tuition and fees, and how much will be used to pay room and board.
For students whom we know already struggle to accurately budget, it’s a recipe for under- or over-borrowing. Having to wait until they receive and pay a final semester bill before truly knowing how much living expenses money they really have at their disposal is exactly not how budgeting works.
A better way forward: buy tuition and living expenses separately
A more straightforward way to help students budget for what they truly need to pay for education, while also holding institutions more directly accountable for the cost of the actual services they provide, is to separate the process of paying for education into buying training and buying living support at each stage of the college financing experience:
The planning phase: The U.S. Department of Education’s College Scorecard should stop presenting costs as an all-in expense. Prospective students should be shown a typical yearly tuition and fee schedule, and an estimate of support costs for those that want or need them. For those who don’t need living support, it provides a more honest price on which to make a decision. For those who do, it still helps them understand what, precisely, they’re buying.
The discounts that end up making numbers “net” prices could still be included but would only apply to the tuition and fee section, which is what most discounts exist for anyway. For uniformity’s sake, Congress and the Department of Education could also require that schools present costs in this way on their website and in any campus marketing materials.
The funding phase: Institutions could just sequentially provide students with two separate aid offer letters. The first would present only tuition and fees less any grant or scholarship aid. For students only looking to buy a degree, or who may be cost conscious, this would help mitigate confusion about what their loan would explicitly cover, as well as abate any concerns about over-borrowing. It is, quite literally, a revenue and expense matching exercise.
Students and families looking for living expense support could check a box on the tuition aid award letter they return that says something like, “I would like to see a financial aid package to cover additional living-related expenses.” Schools could then generate a second award letter about those expenses as well as offer a mix of financing options.
Since these students will have already returned their other aid letter (or checked the box on an online form), financial aid offices would already know if there was excess federal grant or loan aid that could be first applied and then provide a list of alternative funding options that include federal PLUS and example private loans.
Living expenses could be grouped into three or four major categories such as housing, food, transportation, and “other,” which s students could check-mark what they would like to receive support for — or, more important, those for which they do not want support. This gives them the ability to preemptively limit a cost that they can directly control.
The repayment phase: Where borrowing does happen, the US Department of Education could direct loan servicers to bill accumulated tuition and living expense borrowing separately. Yes, this would create a second monthly payment for borrowers, but the billing burden on consumers would be no more onerous than say having an additional personal credit card. For the department it would definitely mean more detailed record-keeping, but the challenges to implementing it are manageable given payment and processing are software driven as it is.
This would also help schools and students better understand the long-term ROI of their degree. By taking the cost of living out of the equation, it’s just more obvious if the cost of the degree is paying off over time compared to a students’ career trajectory.
The benefits of two versus one financial transaction
While the change is small, the benefits more certainly are not. At the absolute least it vastly improves pricing transparency, which will help everyone from students to policymakers not lose sight of how much gets charged for an actual degree. If policymakers could couple this to my one-time, all-in, upfront pricing idea then the federal government could single-handedly eliminate maybe 90 percent of ambiguity that experts believe hinders the college decision-making process.
From a policy perspective, splitting out tuition from living expenses does two important things: First, it helps reveal where and why college costs increases are occurring. This not only can help policymakers create more effective affordability or cost-containment policies, but also more effective lending practices. Solutions that target living expenses are clearly not going to be the same as the ones that target keeping instructional costs or borrowing for actual learning in check.
Second, it makes it possible to build a fairer, and more responsive, federal accountability framework. The institutional Cohort Default Rates (CDR) the department calculates today to determine federal loan program eligibility hold schools responsible for the repayment of living expenses borrowing that they do not necessarily set nor control. Splitting out the two costs would allow the department to utilize a more targeted CDR that is more reflective of the burden borrowers face to cover the costs institutions do influence.
These phases involve differing levels of coordination. Changes to the College Scorecard could, for example, be done instantly. Institutional changes would likely require proactive participation at first but could be cemented in a future reauthorization of the Higher Education Act, which already mandates several required institutional disclosures. The U.S. Department of Education could further incentivize institutional adoption by incorporating the broken-out cost structure into its College Financing Plan template. The biggest structural changes would be to the federal student loan program itself, which would have to separate out the disbursement and servicing of loans for tuition and living expenses, but the mechanisms for doing so already exist.