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. According to Law Insider’s definition, 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, undergraduates or people looking into returning to school should be very interested in calculating net costs even if they will receive financial aid.
Determining Net Cost Before Deciding
When creating the net price calculator, the first total we have to determine is something called the gross cost. Law Insider says 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 amounts 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 U.S. 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.
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 costs.
The net cost of attendance at the school you choose is something that can impact you for years to come. According to the Education Data Initiative, it takes the average American about 20 years to fully pay off student loans.
The Education Data Initiative also shows that Americans owe $1.8 trillion in federal and private loan debts, and the average American will owe a federal student loan debt of $37,113. Also, when you factor in private student loans, the debt can be as high as $40,339.
Growing older doesn’t reduce the burden of the true cost of student loans. A Forbes Report based on existing Federal Student Aid data shows that those between 35 and 49 years owe at least $600 billion in student loans, with some carrying balances of as much as $100,000. And even retirees are not free and clear of these debts. About 2.4 million of those aged 62 years or more collectively owe $98 billion.
In many cases, students who take on larger loans later in life may not be aware that for those who meet the eligibility requirements, there are actually college grants for students over 50 years old that can allow them to reduce the total cost of getting an education.
Look Closely at Net Costs
Ultimately, looking closely at net cost and using the net price calculator provides students with the ability to make informed choices about the real cost of college. Then you could apply for financial aid awards available for first-year students, international student scholarship aids, need-based financial aid and more, depending on your situation or special circumstances. You can also opt not to study full-time and run a small business or work part-time instead. In many cases, this could mean getting the education you want for less money simply by having relevant financial information, including knowing how to read beyond the advertised price.
And remember, there’s a free application for federal student aid for prospective students, including part-time students. You can visit your financial aid office and fill out the FAFSA form. Any federal or state grants you get can reduce your net costs significantly while you study.
Also, 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.
- Law Insider: Net Cost definition
- Law Insider: Gross cost definition
- Ed.Gov: U.S. Department of Education Net Price Calculator Center
- EducationData.Org: Average Time to Repay Student Loans
- Forbes: 2022 Student Loan Debt Statistics: Average Student Loan Debt
- StudentAid.Gov: Federal Student Loan Portfolio
- Education Data Initiative: Average Student Loan Debt by Year
- 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.