Should colleges offer one-time, all-in, upfront pricing for degrees?

Part one 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. Unlike other major investments people make in things like homes or cars — where you start by figuring out what you can afford and then back into what you eventually buy — getting a college degree means starting with a dream, getting in the door and really only then worrying about, or working through, how to pay for it.

This seemingly backwards approach creates what feels like a never-ending list of headaches for students and families that crop up in vague shopping metrics, a confusing financial aid application process and an inability to just get simple questions answered.

The end result? Too often it is consumers holding bags of debt and no degree to give them the wages to eventually pay it all back.

Last year I wrote a deeper report on this for the Manhattan Institute. In the coming weeks, I’ll post here 3 ideas I brought forth in that original report, broken down into a short series for Medium. These are doable ideas, not outlandish, but they do sit beyond the way higher education leaders and policy makers have traditionally thought. If the COVID-19 pandemic has taught us anything it’s that America’s colleges and universities very survival may just rest on ideas that fall beyond “business as usual.”

Part I

Imagine how difficult it would be to finance a car or a home if you didn’t know how much it would cost or even how long you’d be paying for it.

Americans take out loans all the time to fund large purchases. Lenders and borrowers work together to figure out how much someone can reasonably afford, which then sets consumers up within a budget constraint to buy things that offer different features — think audio, wheel or leather trim packages on new cars — or differing levels of overall quality.

Taking out a student loan is the largest purchase most students will make at that stage of their life (sometimes ever). Yet, financing higher ed works in almost the exact opposite way that consumers finance every other large-scale buy. Rather than starting with what is affordable and shopping within that constraint, students instead first shop for the program or degree they want and then back into a mash-up of loans, grants, scholarships, and personal resources to cover the costs.

This Frankenstein approach doesn’t just happen one time either. It gets repeated every year until they either graduate, or drop out.

It is not until the last credit hour has been achieved and the last fee paid that students know precisely how much their education ended up costing, which unsurprisingly leaves many college students with a sense that the debt they have accumulated is now almost unmanageable.

If that sounds weird, it is.

The very nature of the current student borrowing and repayment system makes it hard for even the most financially savvy student to budget accurately. Financial aid offered at the time of admission, for example, doesn’t always match the financial aid awarded at enrollment. This is a particular problem with so-called “last-dollar” state scholarship programs since awards are designed to cover gaps. Landing a private scholarship in June can feel like financial relief until the final bill comes and the student realizes her last-dollar grant ended up getting reduced by the same amount.

Another challenge? Many colleges bill by credit hours yet federal student loans are disbursed by semester. A student who takes a heavy course load in a single semester runs the risk of bumping into annual borrowing limits and finding the need to fill a financing gap.

On the flip side, federal aid rules requiring at least half-time enrollment for eligibility mean that students who are one course short of graduation can find themselves having to take unnecessary coursework and create needless expenses. And simple, unforeseen things like annual changes in student or family financial circumstances can lead to scenarios where grant aid in one year ends up decreasing in subsequent years and must be offset by greater borrowing.

Offer students a one-time, all-in price

A better arrangement would allow college students the option to purchase a degree program at a fixed, total price. Instead of being told that annual tuition and fees for a full-time student are, say, $8,570 or that the institution charges between $450 and $700 per credit hour, students would be told that an “all-in” bachelor of arts degree costs $27,500, or that, say, a five-year professional accounting degree costs $38,700.

For students, an all-in, binding price cap makes it far easier to budget needed resources and also to weigh the cost against perceived future benefits. It is extremely hard to weigh a year’s worth of borrowing against a lifetime of future expected income, especially when you don’t know how many more years of borrowing you’ll still have to do.

In principle, institutions should not have a material difference between offering a price cap and using incremental credit-hour pricing; they would still have the flexibility to charge different rates for different programs. Indirect costs, like housing and meal plan options, would be treated separately and could still be sold to students annually, priced upfront.

As with other large, long-run purchases, students could be presented with flexible payment options and multiyear financing structures, as they are today. For example, they could opt to pay the full cost up-front or finance all or part of the cost with loans. Students who receive scholarships when entering school would see the up-front price reduced, and students who take out loans could continue to seek scholarships in later years, which would then be applied to the principal.

Where federal loans are concerned, students could still borrow annually, under the same limits that currently exist. The only difference is that, depending on the price charged, students may no longer need to borrow after their second or third year.

In either case, the flexible financing structure means that students who need to opt out of such an arrangement could do so and would simply have some prorated amount — most likely, tied to the underlying credit hour pricing — returned to them.

This alternative model would be especially beneficial for the many students who leave school because they can no longer afford to stay enrolled or reach their internal borrowing threshold. While schools would want to have some reasonable overall time limit in place, students who paid the price to enroll would have access to the courses they need for their degree but could progress at their own pace, without uncertainty about future costs.

Flat pricing would also encourage schools to be more responsive to students’ needs. Those students taking too long to complete would eventually become cost centers. Flat pricing would create an incentive for schools to help students not only to get over the finish line but to do so as quickly as possible.

As the COVID crisis tests students’ willingness to buy remote learning at on-campus prices, flat-rate options offer an alternative that might give students the comfort to shift their decision making towards weighing the costs and benefits of the credential rather than the on-campus experience. The schools with the most transparent and affordable options could see enrollment rise with students who otherwise didn’t want to make any investment during this time.

Where schools can position degree programs as invested-in assets that can be financed using more familiar borrowing tools, the comfort level with taking on the necessary debt will surely rise. If this seems like it might initially be weird for the schools, just remember that students and families have been feeling weird about buying without knowing the price for far longer.