Posts Tagged “financial aid”

Perilous Path to Financial Sustainability in Higher Education

The results of the most recent Tuition Discounting Study from the National Association of College and University Business Officers (NACUBO) are telling and worrisome. The study, released last week, examined how much colleges and universities awarded students in scholarship and grants and how deep tuition discounting has become.

The NACUBO study found that the average institutional tuition discount rate for first-time, full-time students hit an estimated 49.1 percent in 2016-2017, up from 48 percent the previous year. The discount rate was highest at small institutions, where the first-time, full-time freshman rate was 50.9 percent for 2016-2017. And perhaps most troubling, more than 25 % of the institutions surveyed have rates well above 50 percent.

Why Does College Tuition Discounting Matter?

Why does this matter?

As Inside Higher Education’s Rick Seltzer points out, the tuition discount rate is defined as institutional grant dollars as a percentage of gross tuition and fee revenue. Translated, a discount rate of 50% means that fifty cents of every tuition dollar never makes it to the college’s bottom line because it is dedicated immediately to financial aid. All but a handful of American colleges and universities are highly dependent on tuition, although they also work to supplement tuition revenue through fundraising in areas like student scholarships.

The problem is that endowments do not fund much institutional grant aid. In 2015-2106, for example, endowments funded only 12.4 percent of institutional grant aid provided to students. In general, 79 percent of aid awarded went to meet need, regardless of whether that need was classified as need-based or merit-based.

Need for Financial Aid Increases but Tuition Revenue is Flat

Mr. Seltzer notes that as tuition prices continue to increase, the share of students with financial need will also likely rise. What’s especially concerning is that the percentage of first-time, full-time freshman receiving institutional grants is estimated to be 87.9 percent in 2016-17. That doesn’t leave much space for the tuition from full-pay students to make much of a dent in the financial aid budget.

The overriding fact is that net tuition revenue per full-time freshman – the cash that supports the college after financial aid — is essentially flat, rising only 0.4 percent in the past year. Worse yet “well over half of survey respondents, 57.7 percent, reported a decline in total undergraduate enrollment between the fall of 2013 and the fall of 2016.” Further, just over half of schools surveyed reported a decrease in enrolled freshmen. The respondents blame price sensitivity, increased competition, and changing demographics as the primary reasons for this decline.

That leaves many colleges in a precarious position. If net tuition revenue is flat, discount rates are rising, the economic headwinds are blowing against them, and their enrollments are declining, financial options are narrowing at most colleges and universities.

A college or university can no longer depend on rising tuition or increased demand to grow its way out of what is now a systemic financial problem.

Discounting Strategies Aren’t Sustainable; Schools Know It but Few Admit It

Yet the most curious result in the survey was on the question of sustainability. In the IHE study, 44 percent of schools reported that their discounting strategies were not sustainable over the long term. Of the remainder, 32 percent said that they were sustainable over the short- but not the long-term. But only 9 percent “were willing to say that their strategies were not sustainable.” They presumably believe that some combination of new programs, better recruitment, and improved marketing strategies could work to improve their competitive position.

Financial aid is a complex question. Many of the colleges now suffering from their discounting practices have increased their discounts, for example, in an effort to serve more financially needy and diverse students. There can be time-specific reasons as well like the development of major new program initiatives.

But the inescapable fact is that American higher education continues to rely on outmoded and archaic financial strategies that used their primary source of revenue – tuition, fees, room and board – to balance out their expenses.

It’s an expense-driven model in which most of the large expenses – financial aid, cost of labor, technology, health care, and debt on capital expenditures – determine the revenue needed, effectively setting the tuition. Any institution increasing tuition much above the cost of inflation, now running at less than two percent, is effectively kicking the can down the road.

Despite the worrisome results of the NACUBO survey, many of us are still betting on American higher education to thrive. It must change how its financial pieces fit together and think imaginatively about how it can finance itself. It is likely that colleges will abandon long-time efforts to finance their capital expenditures exclusively on debt. It is possible to explore creative ways to manage targeted capital campaigns and rethink annual fund efforts. Change will require consortial efforts that move beyond paper and library purchases to see what can be accomplished in common on health care, retirement benefits, and technology.

The NACUBO study forces three conclusions upon us:

  • Higher education must evolve more rapidly.
  • The broad philosophical debates among staff, trustees, and the faculty must be about institutional sustainability.
  • There is only so much time left to take the first big steps.

The Real Reason I Didn’t Go To Your College

Everyone knows that money plays a major role in students’ college enrollment decisions. How big a role?

According to a recent study by Royall & Co., the enrollment management and alumni fundraising arm of EAB, “almost one-fifth of students who were admitted to their top choice of college or university in 2016 but decided not to go there turned it down because of the cost of attendance.”

The study’s finding was echoed in my recent conversation with a well-heeled mother of a high school senior, who expressed sentiments I’ve heard repeatedly for more than 20 years. Her daughter wanted to attend an Ivy League institution that had accepted her. The mother preferred that her daughter accept a large merit award to a prestigious research university. It was a simple cost-benefit analysis by parents, who likely would not qualify for financial aid, seeking relief from high tuition sticker prices.

The Royall findings were fairly uniform with different SAT scores and minority groups. Royall’s managing director, Peter Farrell, concludes: “Something has happened more recently that’s accelerated change. It could be demographics. It could be what we’re seeing on the macroeconomic scale about low socioeconomic (status) families being pinched. I don’t know the actual causality of this change in sentiment, but the slope line of concern seems to be upticking.”

When viewed from other perspectives with different data, the conclusions are the same. The fact is that over 40 percent of the first-time college experiences of admitted students are in a community college.

How Colleges Market “Cost of Attendance” Matters

The obvious answer may be that the sticker prices – now approaching $70,000 at a handful of the selective private colleges and universities — are the culprit. In their interpretation, however, Royall argues that families are more fundamentally questioning the value proposition. Royall asserts that colleges must focus on both their marketing and aid strategy. It’s not so much the discount but the marketing and packaging of the cost of attendance.

“Cost of College” Result of Many Factors

The Royall study also highlights other problems in how Americans understand the cost of a college education. Much of the confusion emerges from a variety of factors including how colleges price themselves, what role state and federal aid play in cost of attendance calculations, the differences between need-based and merit financial aid, and the growing importance of merit aid among higher income families.

The consumer and political pressures over the level of indebtedness that stretch back to the days in which some states offered free college tuition further compounds this problem.

New York’s Free Tuition Plan Resonating Across Other States

It is especially relevant today as the progressive agenda in American politics moves forward with new free tuition plans. Governor Cuomo’s program to extend free tuition to New Yorkers whose families make $125,000 or less annually is last week’s dramatic example.

But the New York State approach will likely resonate elsewhere as the progressive wing of the Democratic Party seeks programs and strategies that will re-attach the American middle class by re-aligning the Party’s value proposition to popular middle class entitlements.

It’s gone beyond major policy shifts emerging from polling and anecdotes that have formed the basis of some education policy. The fact is that America has a growing student debt problem set against a backdrop of persistent and historically worsening income inequality.

Free Tuition Plans are Not Without Costs

It may be that free college tuition is a good next move in enlightened federal policy. It’s just that the “all in” costs of added labor, capital, marketing, assessment, and regulatory reporting expenses seem absent from the cost calculation in the program.

It is equally uncertain that free tuition will do anything to build a seamless pathway for students to improve retention and graduation rates.

For families and independent students, it’s all very confusing. Neil Swidey’s feature in the Boston Globe was a sobering assessment of how students did not fully appreciate the ramifications of their grant and loan commitments.

America’s colleges and universities must bear significant responsibility for the confusion students and families face in determining costs and indebtedness. They are hotbeds of cultural inertia, embracing college aid and pricing strategies from the last century that no longer apply, however noble the original intention might have been.

The hard truth is that the pricing of tuition, fees, room and board has broken down. It’s an “all individuals for themselves” approach that conflates and confuses grants and loans without simple definitions and clear direction. It pits one educational institution against another.

It’s a hopeless educational quagmire because the range of state, federal, corporate, donor and college partners all operate under different rules that make it extraordinarily hard to calculate what and whether to save, where to go, and how to know when you have struck the best deal.

It’s time for common sense to win out in tuition pricing strategies. For families, it begins with a better sense of who’s on first base. For tuition-dependent institutions in an uncertain political environment, time is running out.