Posts Tagged “financial aid”
For the American consumer, there is a good deal of persistent confusion about the cost of higher education. Media reports usually point to the high “sticker price,” which does not reflect the actual cost of an education that most American families pay.
On the public side, it fails to incorporate the subsidy paid annually to public colleges and universities from the state’s annual budget. Indeed, the level of direct and indirect public subsidies often accounts for the difference among states in the level of public sector tuition charged.
Net Tuition Revenue is Key Metric for Higher Education
But the bottom line is net tuition revenue. How much does a college take in after deducting financial aid from the potential revenue received from whatever sticker price they advertise?
This is where the tuition discounts have the most dramatic impact. The average financial aid (tuition) discount at many private colleges and universities is now at 50% of every dollar received. In fact, at many colleges and universities – including some with broad name recognition – this discount has risen to well over 70% of tuition.
Net tuition revenue is flat or declining at many colleges and universities. This is an unsustainable trend.
There are two alternatives. One approach is for an institution to grow, effectively increasing the amount of revenue to offset rising financial aid discounts. The second approach is to find a way to stop the decline of net tuition revenue.
The cold fact is that most higher education institutions are overwhelmingly tuition-dependent, with growth from other revenue like auxiliary enterprises, fundraising, and endowment drawdown extremely limited.
The failure to grow net tuition revenue has become an existential crisis on many college campuses.
Options to Improve Bottom Line May Have Short-Term Success
If the money spigot is turned off, colleges and universities can find temporary measures to hide their institutional financial distress. They can use debt to offset capital and some program expenses. They can turn to temporarily restricted funds in their endowment, essentially borrowing against themselves while they launch new program measures that may provide new revenue to repay the endowment loan.
Colleges can also expand enrollment, grow continuing education, graduate, professional, and online programs, and create new internal efficiencies and economies of scale on campus or through collaboration. All are options to improve the bottom line.
Financial Aid Conversations Feel Like Haggling Over Used Car Price
Enrollment management is as much an art as a science. Colleges run the full spectrum from those with sophisticated, predictive analytical tools to the majority that run their enrollment operations using a financial aid model developed decades ago and modified only at the edges since.
In many cases – especially at colleges that fail to differentiate their mission and programs – the distribution of financial aid is the principal tool through which they close the deal with prospective students and their families to bring in the class. For these institutions, enrollment has become more of an art than a science.
More crudely put, for the American consumer confused by the babble over high sticker prices, college admission is a bargain that looks and feels as unpleasant as the most stereotypical visit to a used car showroom. One can appreciate the pressure on all parties as the negotiations take shape.
Why Do Colleges Charge What They Do?
The crisis over net tuition revenue lays bare one of the biggest cracks in the foundation upon which American higher education rests. Most colleges do not have a clear value proposition that is the groundwork for justifying the price that they charge.
Typically, the language a college uses to explain its tuition and fees sounds like text written from a big accounting firm, explaining incremental increases due to salary increases, rising medical costs, and expanded discounting as the discount rate increases. What is missing in the argument is a case for why tuition is charged, what value a college offers, and what the end product offered is to a prospective student.
What makes this disconnect especially sad is that many higher education institutions provide education of tremendous value. They offer not just technical training but a comprehensive education that goes far deeper than specialization.
The best colleges train students to think by teaching them to write, speak, apply quantitative methods, use technology and work in a collaborative setting.
Colleges Leaders Must Clearly Explain the Value of Higher Education
And here’s the big secret: it’s called the liberal arts. What happens on college campuses in not narrowly political; that is, it’s neither liberal nor about the arts. It’s a way to prepare students of any age for a future in which the specialization they also acquire may matter less because the jobs that they will hold do not yet exist. And we get the added benefit of an informed, educated citizenry that will protect and preserve what we as Americans most cherish.
As Americans’ belief in their political, cultural, and educational institutions continues to decline, we paradoxically offer a higher education system that is the envy of the rest of the world. We must be ever vigilant on matters of cost. But what we need most are advocates who can explain the value proposition before the argument fails to resonate with American consumers.
Swirling around the debates over the high sticker price of higher education is a deeper conversation about the broken financial model that most colleges and universities continue to use to pay their bills. While the largest universities have more options based on the scale of their endowment, fundraising prowess, and research support, most public and private colleges are heavily tuition dependent.
State governments have been withdrawing their historic support for public colleges and universities. These institutions now increasingly rely on tuition, fees, and room and board to pay their bills. Each passing day, their finances look more like private colleges.
That’s not a good thing if higher education is to develop a sustainable financial model. Private colleges rely heavily upon a tuition model that presumes that a family pays based upon their ability to do so — that is, wealthy families should not expect to receive financial support from the college that their child attends.
The stated goal behind the model was to improve access and encourage diversity in all its forms by making college more affordable for students who qualify for support. They do so through financial aid discounting practices that places the burden of support on full-pay families to pay for the discount.
College Financial Aid Model No Longer Useful
Today a new reality has set in, based principally on the fact that the student financial aid model has run to the end of its useful shelf life. Until the early 21st century, it was possible for financial aid administrators to cobble together financial aid discounts, state and federal support especially for public colleges, and loans of various types to make a case to families about how they could afford to pay for college. But cracks began to appear in this practice as the gap widened between what colleges could piece together and what families could afford to contribute.
At some colleges and universities, including often those of very good reputations, the financial aid discount now exceeds 70 percent. It is possible to imagine a scene where their student residence halls will be full but the comprehensive fee received will no longer sustain the enterprise.
The number of “full-pay families” — those who can pay the full comprehensive fee — is decreasing along with the willingness of families to send their children to high sticker-priced colleges. Many of these colleges did not meet their fall enrollment targets in September 2017. Further these institutions often rely on merit scholarships, now extending into the wealthier income brackets. Wealthier families brag about the merit scholarships they receive to encourage their child to attend the college they selected.
When admissions officers calculate financial aid offered to the “set asides” for Division I athletes, academic programs, and special circumstance candidates of various types, there is very little flexibility remaining in a financial aid budget.
Tuition and Fees Aren’t Enough to Cover College Expenses
This aid budget depends on the institution’s ability to meet general college expenses through tuition and fee increases. But this is where the crisis occurs because American consumers have turned against high tuition sticker prices, especially since so few families pay the full price today.
When elite universities charge $65,000-$70,000 annually, the media focus on the extreme rather than on the more moderately-priced institutions that form the majority of America’s colleges and universities. But it is an open question whether the sticker prices over $40,000 resonate with the American public anymore.
It’s a mess with few supporters backing the old financial model upon which American higher education has historically depended to finance the enterprise.
America’s colleges and universities are certainly aware that they face a crisis of confidence, credibility and economics ahead of them. The question is how well and how quickly will they respond to this crisis.
Three things must occur:
The first is that higher education must recognize that its colleges and universities – whether public or private – face a situation that will not be ameliorated by outside factors like an improving economy or rising wages. The fact is that most American families believe that college is a right and not a privilege. They are less likely to devote the personal resources necessary to have skin in the game.
The second is that higher education must have an open, prioritized conversation about how to pay its bills. It is unlikely that a single partner such as the federal government will step in like a white knight on a singular mission to save higher education. A better policy is to determine the range and level of funding sources available to colleges across its historic funders. This includes both operational and capital support from all sources. The most important decision will be whether to keep the decentralized higher education system in place with reinvigorated and better-defined missions and purposes.
Finally, higher education must imagine the possible. It is likely that America’s colleges will see a wave of mergers, closures, and acquisitions over the next 50 years. If so, how will this be managed? For those institutions that have achieved sustainability, what are the terms that bring people, programs, facilities, and technology together to foster common agreement on what higher education contributes to America?
America’s colleges and universities have evolved successfully for nearly 400 years. They are nimble, creative and distinctive. Higher education must go forward with transparency, purpose and urgency. To begin, it must demonstrate its willingness to change and adapt.
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.
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.
