Did you know that the price tag on something isn't the true cost? There are actually multiple factors that go into every purchasing and financial decision you make that alter the "published purchase price" that you're paying out of pocket based on the reality of your purchase.
However, most people get so caught up in looking at the price they're responsible for paying that they don't look at peripheral factors that can actually bring that price up or down in terms of real pricing. This real-world cost that transcends the sticker price of something is called net cost.
What Is Net Cost?
To know how much something will cost you, you must figure out how to calculate its net cost. The simplest way to form this concept into an equation is to say that the net cost of an item is its gross cost minus its financial benefit.
You don't necessarily have to be talking about a physical item you purchase at the store when discussing net costs. We can use net cost to determine the actual cost of anything. Both individuals and businesses can use net cost as a tool for making smarter decisions about investments. That includes things like college tuition. That's precisely why many students, new graduates or people looking into returning to school should be very interested in calculating net costs.
Read More: Cash Gift Etiquette for Graduations
Determining Net Cost Before Deciding
When creating a net price calculator, the first total we have to determine is something called the gross cost. The gross cost of an item is its actual price. For a student considering the cost of tuition for the upcoming semester, the gross cost of attending a particular school would be the sum that you get when you add together tuition, books, room-and-board fees and any other fees or amount of money that contribute to the cost of education.
In the case of college costs, students have to subtract any money added to the equation as a benefit from the gross cost to get the actual cost they'll be paying. This includes scholarship money, financial aid and work-study funding. These decreases in price are referred to as "cost benefits" when figuring out net cost.
The Department of Education formally defines the net price for college tuition in the United States as "the amount that a student pays to attend an institution in a single academic year AFTER subtracting scholarships and grants the student receives."
It's important to note that scholarships and grants are different from student loans. You can't actually consider loans benefits that are subtracted from your gross cost because loans must be paid back. In this way, they're simply a deferred portion of a real gross cost. The same goes for any college savings or annuities that you use to pay your tuition. These are not considered benefits because they're still costs you apply toward your education out of your own pocket.
By contrast, scholarships and grants are forms of financial aid that are usually awarded based on a student's income statement that the student will never have to pay back. This is why they bring down the gross cost.
Read More: How to Use an Annuity to Pay for College
Beyond College: Net Cost in Life
It's not only college-bound people who have to worry about net cost. We can use net cost as a tool to make smart assessments about purchases in everyday life. Of course, the process is the same even when you're talking about tangible items that you purchase.
For instance, you may purchase a new lawnmower for a gross price of $1,000. However, you're purchasing the mower knowing that you'll get a $200 rebate if you mail in a proof-of-purchase form. You subtract that $200 from the gross price to get a net cost (true cost) of $800 for an item that retails at $1,000.
Net Cost When Deciding on a College
Net cost is important when you're comparing tuition costs among colleges because it helps you do a true apples-to-apples comparison. Simply basing your decision on the gross cost of each college may not lead you to the best financial decision. In some cases, you may end up paying less for a more competitive school based on the value of the benefits you can subtract from the gross cost of tuition. Things like scholarships and grants can actually create two very different cost figures even when you're looking at two schools that have the same base tuition.
Ultimately, you should never turn down or accept offers from schools until you've done full side-by-side comparisons of net tuition cost.
Read More: Do Consolidated Loans Figure Into New Student Loans?
The net cost of attendance at the school you choose is something that can impact you for years to come. Polls reveal that it takes most Americans close to 20 years to fully pay off student loans.
Data released by StudentAid.gov reveals that more than 14.2 million people between the ages of 35 and 49 are still paying off student loans. The data also reveals that around 2.3 million Americans age 62 and older are still paying down debt related to college, whether their own or their children's. In many cases, students who take on larger loans later in life may not be aware that there are actually college grants for students over 50 years old that can allow them to reduce the total cost of getting an education.
Read More: College Grants for Students Over 50 Years Old
Ultimately, looking closely at net cost provides students with the ability to make informed choices about the real cost of college. In many cases, this could mean getting the education you want for less money simply by understanding how to read beyond the advertised price.
As a college student, calculating your personal net income to get the bottom line on what you owe can also be beneficial for your personal finance plan. This may help you manage your monthly budget to account for higher tuition costs.
Read More: Typical Monthly Budget for a College Student
- In some cases, you may have a financial loss due to the purchase of an item. In that case, you would add the additional cost to the gross cost to get the net or "true" cost of the purchase.
- Determining the net cost of a purchase will help you to determine if the investment was a smart decision that should be repeated in the future.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.