In most industries, pushing a loan on naïve consumers without clarifying that it is, in fact, a loan, would invite outrage and a possible regulatory clampdown. In higher education, it’s business as usual.
This week, the Government Accountability Office (GAO) published a report revealing that colleges give unclear and sometimes deceptive information to prospective students in financial aid offer letters. The aid offers may mislead students into thinking they will pay much less for college than they actually will. This lack of price transparency is not only disingenuous, but it allows colleges to get away with charging higher prices than they could in a well-functioning market.
In an ideal world, a college sends a student a financial aid offer detailing the full cost of attendance, including tuition, fees, books, and estimated living expenses if applicable. Then the letter lists sources of grant aid which do not need to be repaid, including institutional scholarships and government aid like federal Pell Grants. The letter subtracts grant aid from costs to yield net price. It gives students options to finance those remaining costs, potentially including loans.
In practice, few colleges live up to the ideal. For its analysis, GAO collected 522 financial ai offers from a nationally representative sample of 176 anonymized colleges. GAO then determined whether colleges complied with an accepted list of best practices in financial aid. Not a single school satisfied every criterion.
Most financial aid offers are misleading at best
The most important component of a financial aid offer is net price. Put simply, it’s what students need to pay after applying all grants and scholarships. This figure ought to be prominent on any offer.
But 41% of financial aid offers did not include the net price at all. GAO cites one example that simply listed grants and loans, but included no information on costs after aid. Another 50% of offers listed a net price, but understated it by factoring in loans (which students must repay, at least in theory) or failing to include all the costs of college. Just 9% included an accurate net price.
GAO highlights an aid offer which told the recipient student they would need to pay just $351 in the spring semester and nothing in the fall. But the “aid” package included $5,400 in federal loans to the student and $35,500 in loans to his or her parents. The actual net price for this student was over $40,000.
As if that weren’t enough, the student in question qualified for Supplemental Educational Opportunity Grants, meaning the Education Department determined he or she had exceptional financial need. Yet the college still saw fit to push $40,000 in loans on this low-income student and his or her family. And that was just for one year.
That college at least had the decency to label those loans as loans. Some schools cannot even be bothered to do that. Per GAO, 24% of colleges do not distinguish between grants and loans on aid offers, meaning students cannot easily tell the difference between money they are given and money they will have to repay. One letter listed three different types of federal loans simply as “sub,” “unsub,” and “PLUS.” Nowhere does the word “loan” appear on that letter—yet the school pushed nearly $25,000 in federal loans on this student.
Price opacity has broken the higher education market
As GAO notes, the federal government requires mortgages, credit cards, and even private student loans to come with standardized disclosures that inform consumers how much they are borrowing and how much they must repay. No such requirement exists for federal student loans.
The predictable result is that students are frequently unaware of how much they are borrowing. Researchers at the Brookings Institution found that almost half of college students underestimate their debts by 20% or more. Around one in seven didn’t realize they had student debt at all.
Such a lack of price transparency allows colleges to jack up prices on the sly. In a well-functioning market, consumers can compare prices and shop around for the best deal. But when colleges make it difficult or impossible for students to understand how much they are paying, that mechanism breaks down. Colleges can raise prices well above what they could charge in a truly competitive market.
Confusing aid letters are just one aspect of a system designed to conceal true prices from students and their families. Most of the time, students have to apply to a college before they know their net price, which limits their ability to comparison-shop. Colleges hire expensive consultants to estimate exactly how much tuition they can squeeze out of students before they walk away. Schools lure in students with generous grant aid during the freshman year, only to slash scholarships once those freshmen become captive sophomores.
How to make prices transparent
On Monday, Representatives Virginia Foxx (R-NC) and Lisa McClain (R-MI) introduced the College Cost Transparency and Student Protection Act, which aims to correct the deficiencies GAO identified. The bill requires federally-funded colleges to abide by a set of rules when communicating financial aid offers to students.
Under the bill, schools cannot include loans when calculating stated out-of-pocket costs. Students must affirm they understand how much they are borrowing by typing in the loan amount before they accept it. Aid offers must also include estimated loan payments and monthly earnings after graduation so students can gauge the affordability of their loans before they borrow. Students are far more likely to repay their loans when their debts are lower relative to their earnings.
The bill stops short of requiring colleges to use a standardized financial aid offer letter, as many advocates want, but it would take large strides towards providing transparency on college costs and ROI.
Policymakers could consider additional reforms to promote price transparency. The federal government could collect and publish better data on net prices so students have a firmer idea of how much they will pay before they even apply. Schools could be encouraged to disclose the “all-in” price students will need to pay to earn their degrees, rather than determining tuition on a year-by-year basis.
Prices are the foundation on which markets operate. Without price transparency, markets cannot function, and there are few markets more dysfunctional than higher education. GAO has shone a light on shameless attempts by colleges to hide their true costs. The path to fixing higher education must begin with making prices transparent.
