Research

New Resource Breaks Down Basics of College Affordability

• By Sri Ravipati
• 04/21/17

A sticker price of $50,000 a year for a private, four-year university can dissuade many students from applying, but new research argues that “college affordability” encompasses a lot more than just upfront costs.

The Urban Institute, with financial support from the Lumina Foundation, earlier this month launched “Understanding College Affordability,” a website that informs students and families on the basics of college affordability. It breaks down college costs into short sections for parents and students, touching on what they need to consider and offering data-driven resources on financial aid, student expenses and more.

For starters, sticker price is not an effective indicator of the cost of college, according to researchers Sandy Baum, Martha Johnson, Victoria Lee and others at the economic and social policy think tank. Many students and families do not understand that tuition covers only part of the overall cost of attending, while the institution picks up the rest of the bill — “instructors, student services, administrative support, maintenance, among other expenses,” the site states. In fact, the researchers found that many students who pay full tuition are still paying less than the cost it takes for the institution to educate them. The researchers provide data on how colleges use appropriations, endowments and other revenue sources to bring down the overall cost of education for students.

Therefore, it is important for families to consider the return on investment for any educational program, they argue. Families should also figure out their break-even point, or the point at which a college graduate’s extra earnings over time are enough to compensate for having been out of the workforce, to see if a college is “worth it” in the long run.  

College affordability is about more than what you can pay now, and there are a range of varying costs to be considered as well. The website has a section dedicated to student fees (i.e. costs of student activities, athletics, graduation and more), for example, which The Hechinger Report reported are rapidly rising nationwide, “even faster than tuition.”

Yet, upfront costs like tuition still can turn students away. Another recently published Lumina-funded research report from the Institute for Higher Education Policy (IHEP),  “Limited Means, Limited Options,” analyzed more than 2,000 colleges’ net prices and found that college is unaffordable for most students. IHEP came to this conclusion using the Lumina Foundation’s affordability benchmark called the “Rule of 10”: The student (or family if they are a dependent) should be able to save roughly 10 percent of his or her discretionary income over a period of 10 years prior to college, with the student working 10 hours per week (500 hours yearly) while enrolled full-time. “To be considered affordable, the total 10-year savings plus part-time earnings should be cover the entire costs of a four year degree,” according to the report.

For example: A student’s parents earn a combined $100,000 yearly income for their family of four. Their Federal Poverty Guideline would be about $24,300, which means their discretionary income is $51,400 ($100,000 per year – 2 people x $24,300). The student would earn about $14,500 ($7.25 per hour x 500 hours per year x 4 years) working part-time, so the family would be able to afford a program with a total sticker price of $65,900 ($51,400 + $14,500), or $16,475 per year on average.

Since the Rule of 10 benchmark is based on discretionary income, students or families with an income less than 200 percent of the Federal Poverty Guideline for their household size are not expected to save for college. In addition, IHEP found that out of 2,000 colleges, 48 percent were affordable only to students with a family income exceeding $160,000 and 35 percent were affordable to students with a family income exceeding $100,000. Students from lower income brackets could only afford about 1 to 5 percent of colleges surveyed.

The Urban Institute came up with slightly higher numbers (with $16,838 as the average annual tuition for both public and private nonprofit four-year colleges), but added that graduation time and loans impact affordability and the break-even point. Both resources include student profiles to illustrate how college affordability works for students from different backgrounds.

While the Urban Institute website cannot provide a yes-or-no answer of whether college is affordable, its information “can increase understanding of how much students in different circumstances pay for different kinds of education and of the resources they can draw on to cover their expenses,” as stated on the site.

View the resource here.