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A Problem of Fit

How the Complexity of College Pricing Hurts Students—and Universities

A Problem of Fit

How the Complexity of College Pricing Hurts Students—and Universities

A critical examination of the complex system of college pricing—how it works, how it fails, and how fixing it can help both students and universities.

How much does it cost to attend college in the United States today? The answer is more complex than many realize. College websites advertise a sticker price, but uncovering the actual price—the one after incorporating financial aid—can be difficult for students and families. This inherent uncertainty leads some students to forgo applying to colleges that would be the best fit for them, or even not attend college at all. The result is that millions of promising young people may lose out on one of society’s greatest opportunities for social mobility. Colleges suffer too, losing prospective students and seeing lower enrollments and less socioeconomic diversity. If markets require prices to function well, then the American higher-education system—rife as it is with ambiguity in its pricing—amounts to a market failure.

In A Problem of Fit, economist Phillip B. Levine explains why institutions charge the prices they do and discusses the role of financial aid systems in facilitating—and discouraging—access to college. Affordability issues are real, but price transparency is also part of the problem. As Levine makes clear, our conversations around affordability and free tuition miss a larger truth: that the opacity of our current college-financing systems is a primary driver of inequities in education and society. In a clear-eyed assessment of educational access and aid in a post-COVID-19 economy, A Problem of Fit offers a trenchant new argument for educational reforms that are well within reach.

176 pages | 10 line drawings, 13 tables | 6 x 9 | © 2022

Economics and Business: Business--Industry and Labor

Education: Education--Economics, Law, Politics, Higher Education


"Providing detailed economic analysis of the effects of sticker price, tuition discounts, merit and need-based financial aid, and institutional competition, Levine contends that the overall impact from these multiple factors is to limit access to higher education for lower-income students. He takes specific aim at the problem of opaque financial aid and how it serves to heighten inequities in higher education. And he offers an excellent discussion of the pros and cons of two major policies for improving access to college—the various versions of 'free college' and a significant increase (read: doubling) of Pell Grants."


"A Problem of Fit [examines] the pricing system in American higher education, exploring the market factors that contribute to its problems....Levine [addresses] barriers to higher education beyond those directly related to pricing, such as excessive levels of student loans, the complexity of the college application process, and difficulties in understanding financial aid award letters."

Journal of Economic Literature

"Levine’s text is a quick and engaging read that we highly recommend. In each chapter, he does a fantastic job of identifying what matters for an audience’s understanding of these complex, interrelated issues and communicates them in a way that is approachable and allows readers to connect the pieces of this big puzzle. Levine’s text captures a high level of nuance that escapes most of the public and many policymakers. As such, this should be a required reading for higher education finance courses and new legislator orientations alike."

Teachers College Record

"If you want to understand the nuances of college affordability, pricing, and finance, this book is for you. Levine has taken an issue that impacts the majority of families going through the college search process and deconstructed its complexity. Whether you are a student, policy maker, or higher education practitioner, this is an important read."

Angel B. Pérez, CEO, National Association for College Admission Counseling

"Levine combines accessible economic explanations with cogent policy recommendations to frame the challenges facing students and families navigating the complex world of college financing. His forceful critique focuses on analysis and solutions rather than anger and blame, forwarding ideas about targeted new funding and improved communication with the potential to help students enroll at the institutions that will be the best fit for them."

Sandy Baum, Center on Education Data and Policy at the Urban Institute

Table of Contents

Chapter 1: The Institution of Financial Aid
Chapter 2: An Econ 101 View of College Pricing and Financial Aid
Chapter 3: The Real Cost of College and Its Worth
Chapter 4: Pricing Transparency
Chapter 5: Addressing Affordability
Chapter 6: Fixing the Pricing System in Higher Education
Chapter 7: Other Barriers to College Access


       My oldest son was born in 1994. I was an assistant professor at Wellesley College at the time. Two years later, I received an offer to take a one-year leave of absence from Wellesley and work as a senior economist in the White House Council of Economic Advisers (CEA). I accepted the position, and my family moved to Washington, DC, in 1996.
       My portfolio at the CEA included labor market, education, and welfare policies. A big issue at that time was tax policy designed to help reduce the cost of higher education. One result was the introduction of tax-deferred college savings accounts, so-called 529 plans, which were included as part of the Small Business Job Protection Act of 1996. These plans work like individual retirement accounts (IRAs) for college.
       My son was two years old then, and we had another son early the next year. I understood the benefits of 529 plans very well, so I opened accounts for each of them and started funding them immediately.
       When my older son was fourteen years old, I wanted to know whether I needed to continue making those contributions. Had I already saved enough for college? As a professor, I make a good living, but not so much that paying for college would be easy. Knowing how much I needed to save required knowing how much college would cost. I wondered whether our family would be eligible for any financial aid and, if so, how much.
       That is when the problem started. For current students reading this book, yes, the internet existed in 2008. Google had all the answers even then.
       Well, it turns out not quite all of them. As hard as I looked, it became obvious that figuring out if my son would be eligible for financial aid was impossible. All school websites posted the “cost of attendance” (COA), a formal term that included all costs, including tuition, room and board, books, and other miscellaneous expenses. Federal law required that COA be reported. That number was often big —around $60,000 back then at many private colleges and universities.
       But each school’s admissions and financial aid web pages also made bold claims —“our school is affordable!” Their web sites would include a page, /affordable. It would tell me that the school offered generous financial aid and that a large fraction of their students (50 percent? 80 percent?) of their students received that aid. Often there would be student testimonials indicating how it would have been impossible for them to have attended the school without the help of the financial aid available.
       Why are they telling me the school costs $60,000, but then telling me that a large fraction of their students do not pay that amount? What amount do they pay? Some would include statements like “The average student receiving financial aid pays $20,000” or some such figure.
       If my family were eligible for financial aid, would we pay the average amount? Would we be expected to pay more or less than that amount? I wanted to know about how much we would have to pay.
       It turned out that it was impossible to get a personalized answer to the question of how much any of these colleges would cost my family. It occurred to me that if I could not figure this out, as an economist who looks at numbers and data and dollar amounts for a living, then surely many other parents could not figure it out either.
       For students from lower-income backgrounds, this would pose a far more significant impediment in their college search process. With greater financial need, understanding college costs is a more pressing issue for them. They may also have less exposure to the system of higher education, making it even more difficult for them to figure out how much college costs. Why risk searching for schools and falling in love with one or more of them without some understanding of whether it is even remotely financially feasible to attend?
       New federal legislation went into effect in 2011—on account of the 2008 Higher Education Opportunity Act —mandating the use of “net price calculators” at every institution that receives federal funding for financial aid. These calculators are school-specific. They are supposed to help students understand what their cost of college would likely be after factoring in financial aid (the “net price”). The reported results are detailed estimates, not a contract fixing the price that the student really will pay. The final net price still requires filling out and submitting financial aid forms and a lengthy review process to determine an exact net price.
       In practice, though, the calculators typically are not user friendly. They often use tax jargon and require inputs from tax forms. The fear and confusion that those tax forms generate is often enough to scare away potential users. They are also sometimes designed to garner prospective students’ contact information to be used in a school’s recruiting process as well as to provide them with an estimate of their net price. Combining those goals can turn off users who may resist identifying themselves as they enter their own private financial data. The introduction of net price calculators made it possi­ble for a family to get an estimate of what a college would cost them, but it is still a difficult and anxiety-producing task.
       This is what brought me to write this book. I am an economist, and economists understand markets. Higher education is a market, with colleges and universities representing supply and students representing demand.
       But markets require prices to function well. Markets exist when there are those who want something and are willing to pay for it and others who are willing to provide it for a payment. How much of those things are produced and who gets them can be resolved by a well-functioning market with prices determining who gets what. If prices are opaque and not well understood by either side of the market, the market will not function well.
       Economists routinely point to the market for health care in the presence of insurance as an example of a market where prices are not well known to the consumers of health care (i.e., patients). Most people have no idea how much a regular medical visit costs, since insurance pays the bill. Those with insurance may think it is a low cost, even though it is really more expensive...
       The market for a college education in the United States has the opposite problem. The only price that students often know is the full COA (the “sticker price”), when for most students, it is really less expensive than that. Part of the problem is that the federal government requires institutions to post that high price, and it is often the easiest number to find. In 2020, it hit $75,000 or more at some elite private institutions and $30,000 or more at public institutions for state residents. Most people cannot afford even the lower amount. At such a high perceived cost to the individual, people may be tempted to go to college “too little.”
       Yet most students do not pay the sticker price. The amount they pay is reduced, possibly substantially, by financial aid. What matters is the price they pay after incorporating that aid. If they do not know the amount of aid, they do not know the price. People treat health care costs as if they are less than they are and college costs as if they are more than they are. Both distort market outcomes.

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