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Net Price Calculators: Be Wary

Mark Kantrowitz is the go-to person when it comes to anything involving financial aid for college and graduate school. He's the publisher of the Fastweb and Finaid websites and author of Secrets to Winning a Scholarship.

He weighs in on net price calculators.

Mark Kantrowitz: Every college must provide a net price calculator on its web site by the end of this month (by October 29, 2011, to be precise). These calculators are intended to help students and parents make informed decisions about college affordability when considering where to apply for admission. But there are several flaws with net price calculators that limit their accuracy. Accordingly, families should be careful in how they use net price calculators and interpret the results. Net price calculators can be useful tools for identifying additional colleges worth considering, but should not be used to compare costs among different colleges or to rule out some colleges.

The net price is defined as the difference between the college's cost of attendance and the average grants for similar students. The calculators base the net price on the family size, number of children in college, dependency status, student income and parent income among other variables.

But the calculators are unlikely to yield a net price that matches the financial aid award letter or the bursar's bill. They offer rough estimates, not guarantees. The net price calculators will be used in the fall, before most colleges set their tuition rates and financial aid budgets for the next academic year. This means the net price estimates will be based on one-year-old cost and financial aid data. Some calculators will be based on a federal database which contains two-year-old data that isn't updated until December.

There's also a tradeoff between accuracy and simplicity. Some colleges will implement their own calculators, asking dozens of additional questions to provide a more precise estimate of the costs.

The federal definition of net price is also flawed in ways that may cause the net price calculators to understate the actual bottom-line cost by thousands of dollars. The average grant is calculated as the average among just grant recipients, not all students in the specified income range. Public colleges are required to provide a net price figure for in-state students only. Out-of-state students are often charged much higher tuition rates. The net price figures are limited to data for first-year full-time students. Colleges that provide greater grants to first-year students, called front-loading of grants, may appear to be less expensive than they really are.

Finally, some colleges are highlighting a misleading net cost figure on their calculators in addition to the required net price figure. The net cost is the difference between the cost of attendance and all financial aid, which includes loans in addition to the grants. But loans must be repaid, usually with interest, and so do not cut college costs. This may confuse families about the real bottom-line cost of college, leading them to take on more debt than they can afford to repay.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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