Understanding the College Pricing Ladder

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By Rajkamal Rao

May 1 is the deadline for students to accept offers of admission from colleges and lock in their seats. Many families struggle with how to balance multiple offers of admission. Invariably, the struggles relate to the costs of college attendance (COA).

In the United States, the COA is collectively borne by the family, the student, the university or college through their endowments (called institutional aid), the state government (in the case of public colleges), the federal government through its massive Education Department budget, and private entities which make merit scholarship awards, such as those associated with the National Merit Scholarship program.

The degree to which each of these external parties assumes financial responsibility will determine how much the family ends up paying. For example, the breakdown for the UT Me Scholarships for low-income families is represented below ((If image is not clear, click on the image & right-click to "Open Image in New Tab").



Nearly all financial awards are need-based. External merit scholarships are rare, and when given out, are rather small. Most are one-time.  Exceptions are awards associated with the National Merit Scholarship Competition, such as the Finalist awards. Some awards can be so generous that they can fully pay for a student's tuition, room, and board for all four years of college.

Other exceptions are when students pursue in-demand fields in which the U.S. government has an interest. President Bill Clinton signed a directive to strengthen cyber capabilities of critical infrastructure; information and communications, energy, banking and finance, transportation, water supply, emergency services, and public health, as well as those authorities responsible for the continuity of federal, state, and local governments. The CyberCorps scholarship has since funded undergraduate students to up to $75,000 for three years of education. 

Students pursuing a Doctor of Veterinary Medicine can get attractive scholarship and internship funds from the U.S. Department of Agriculture. Students admitted to any military academy will receive a full ride plus expenses provided they sign a contract to serve in the U.S. armed forces. ROTC scholarships also offer comparable benefits.

But this article is dedicated to awards based on financial need. Determining financial need is a complex exercise and is facilitated through the Free Application for Federal Student Aid (FAFSA®) website, run by the U.S. Department of Education, and the College Scholarship Service (CSS), run by the College Board. Review this excellent step-by-step video about how to apply for FAFSA.

So, what is the difference between FAFSA and CSS?  Think of FAFSA as your gateway to federal funds, and the CSS as your ticket to institutional funds, such as private college endowments and grants. The CSS is a lot more invasive in the sense that it seeks more financial details about your family than does the FAFSA.

Public colleges and universities (such as UT Austin and Texas A&M) require the FAFSA. About 400 private colleges and universities require both the FAFSA and the CSS profile. Both websites employ complex algorithms and business rules. They take into account numerous family financial situations such as the age of parents, income, savings, debt, size of household, number of college-going students, assets, alimony payments, and other parameters.

The main sources for this information are the tax returns filed by the parents (and the student, if the student is employed). The prior-prior year is important here. If your student is starting freshman year of college in 2020, your family's 2018 tax returns are required. Deliberately filing erroneous information, with the intent of extracting a more favorable need-based determination, is a violation of numerous federal and state laws.

Some private colleges say that they are "need-blind" - that is, they make admissions decisions regardless of your family's financial situation. Federal law is clear in this regard. Section 568 of the Higher Education Act says that a college is not considered need-blind even if its policy helps students in financial need. Wikipedia maintains an excellent list of need-blind and need-aware (schools that factor a student's ability to pay whether or not they will be accepted).
Unfortunately, some need-blind institutions wade into need-aware territory and get into trouble.
According to a 2022 lawsuit filed against 16 elite schools, the University of Pennsylvania and Vanderbilt, for example, have considered the financial needs of wait-listed applicants although the schools claim that they are need-blind. Doing so is just as unlawful as awarding “special treatment to the children of wealthy.” In January 2024, top schools decided to pay $104 million in fines to settle the lawsuit. The bottom line is that need-blind schools should NOT look at the financial ability of a student whatsoever in making admissions decisions, poor or wealthy.
Some need-blind colleges (most top institutions such as Stanford, Yale, Harvard, and Rice) promise to meet the "full demonstrated financial need" of the student - after offering admission to the student based solely on the student's merit. This means that they will cover the difference between your EFC and the sticker price (see our graphic above) through a combination of grants, scholarships, and work-study programs. Loans, should they appear at all in the package, will be an insignificant part.

The need-blind private colleges that fully meet the student's demonstrated financial need use a simple formula - the so-called $65,000/$125,000/$200,000 rule.

According to this rule, if your family makes $65,000 or less (with proportional assets), the institution will pay for tuition, room, and board. The entire expense of college is completely free.  For such students, organizations such as Questbridge will even pay college application fees, and for all expenses at summer programs at the top-40 schools between junior and senior year. We always implore low-income students not to consider public universities at all and concentrate all of their efforts on private need-blind colleges. Of course, the only catch is that students should win admission to these colleges, to begin with.

If your family makes between $65,000 and $125,000 (with proportional assets), the institution will pay for tuition, but you're still responsible for room and board. There are always exceptions. Harvard and Stanford are more generous in wiping out tuition fees for family incomes up to $150,000. The University of Southern California is far less generous, capping incomes to $80,000.

Between $125,000 and $200,000 (with proportional assets), the tuition fees are prorated. So, if your income is $162,500, your tuition fees are halved, but you would still pay full room and board.

The engines make several assumptions regarding proportional assets. If a family has an annual income of X, the programs will automatically assume that assets are some multiple of X. For families with lower incomes, up to $65,000, the multiple is less than 1. For families with incomes higher than $65,000, the engines assume, logically, that the multiple rises exponentially from 1. The more your savings or your assets, your financial need is deemed to be less, so you're likely to receive far less in aid.

The FAFSA4caster, the official net price estimator of the Department of Education, uses an X factor of approximately 0.53. That is, if your income is $100,000 a year, it assumes that your family's net assets are $53,000. Conversely, if your net assets are $300,000, your annual income is deemed to be $566,000 a year. At such asset levels, you can be sure that you will receive no need-based aid.

The College Pricing Ladder

The top line for the college cost of attendance is the sticker price. But just like when shopping for a car, no one pays the sticker price.

How much your family pays for college is unique, much like an airline seat. It is mainly dependent upon FAFSA's and CSS's determination about how much both programs think your financial need is.

Federal grants and college cash awards, funded through college endowments, bring down the sticker price. These are monies that do not have to be repaid, so they're a great bargain. The so-called "full-ride" awards are essentially cash awards from colleges that will not charge tuition fees at all. Tax credits and deductions make up the remaining components of the "free money" bucket.

The "Net Price" is simply the difference between the sticker price and the discounts the family has been offered. Remember that the family is ultimately responsible for the Net Price.

Net Price estimates tend to deviate significantly from the sticker price largely for private colleges and universities - which tend to offer tuition discounts. For public schools, the tuition sticker price is fixed by state law and falls into two categories - the discounted in-state tuition or the more expensive out-of-state tuition. For many families, in-state public colleges represent the best bargain because they are more affordable and there's always a college that will accept a student, regardless of high school performance. For some students, it may be worthwhile to consider out-of-state colleges that may offer in-state tuition benefits in that state for specific majors - generally on a reciprocity basis.
Working your way up from the bottom of the image above, the first number is called the Estimated Family Contribution (EFC). This amount is a result of the FAFSA engine's computation (the Student Aid Report, or SAR) when you file your FAFSA application - and is nonnegotiable unless family circumstances for costs and income change. The EFC is the minimum the family must pay, and is like a deductible when filing an auto insurance claim.

The difference between the EFC and the Net Price is called the Gap amount. The Gap is always the responsibility of the family. It can be met by family savings or borrowing. The borrowing could be a subsidized or unsubsidized loan offer from FAFSA. Or it could be from a Parent PLUS loan which has more generous limits but much higher interest rates. Or it could be from a private bank. Students who win work-study awards are contributing to the Gap amount, but with their sweat rather than with cash.

Source: Department of Education

To review a typical loan schedule so that you can estimate your monthly payments on a student loan when you know the Loan Amount, Interest Rate  (e.g., 5.30%), Loan Term in Months (e.g., 120) and the Number of Monthly Payments in the First Year (assuming you want to make more than 12 payments), use a mortgage calculator

Glossary of Terms, Image Courtesy: The University of Texas, Dallas

Our takeaway

Take a minute to study the example graphic above of a college with a sticker price of $75,000. This is today the average published cost of attendance at most Ivy League and world-class institutions. Notice how various pricing components kick in above the family's EFC. A $40,000 - $50,000 EFC determination is normal for a U.S. household with two children with both parents working in professional jobs. Remember that families must pay at least the EFC amount, no questions asked.

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