In my last post, I wrote about how admissions works, although the lesson, perhaps, is that the term “admissions office” means very different things at different institutions. And while it’s still true that we in admissions and enrollment management all agree on one thing—that if a student never applies, they won’t enroll—it’s also true that the final step in the process is the processing and delivery of financial aid.
A caveat: This is hard to grasp on the first pass—if it sometimes does not seem to make sense, that just means you probably understand it better than you think you do. I recommend paper, a pencil, and some note-taking to get you through this. It’s going to be challenging to navigate.
About 15 years ago, I started gauging the age of my audience during presentations by putting an image on the screen. It’s the floorboard of an automobile, showing part of the brake and floormat for some context. You’re likely to notice the bright red carpet before you notice something else that doesn’t look quite right: To the left of the brake is a silver button, a little bigger than a quarter. I ask the audience members to raise their hands if they know what it is. As time goes on, a smaller and smaller percentage of people in the crowd know what they’re looking at.
We Baby Boomers know it’s a headlight dimmer switch, of course, and if you knew what I was talking about, your perception of financial aid might need to be brought into the 21st century. For as much as dimmer switches have changed in the past 40 years, financial aid has changed even more.
First, the easy part. Let’s define financial aid for our purposes: It consists of three basic components that colleges put together in combination to create a financial aid package so that students can afford to attend, or so that the student will want to attend, the college:
- State and federal grants, which are usually administered by, but not determined by, the college. This might be the Federal Pell Grant, for instance, or the New York TAP, the Iowa Tuition Grant, or the Oregon Opportunity Grant.
- Self-help programs, including on-campus employment, and especially, student loans from various sources and in various amounts. The complexity of student loans might be sufficient for a whole blog post, but for now, just realize that the loan amount plus interest has to be repaid using future resources.
- Institutional aid, which comes from two general sources: Funded scholarships (where a donor has generously provided money to students who meet certain specified criteria) and unfunded scholarships, or “discount,” where the college simply agrees to forego the tuition revenue for a certain student or group of students.
If you know a little bit about accounting, you have probably already recognized that one of these sources of financial aid is different from the others, and while all sources of financial aid are critical to student enrollment, it’s the use of the last type—unfunded aid—that is confusing to parents and students and to people who don’t do enrollment management for a living. That’s what most of this post will focus on here. Sometimes, that institutional aid is used to meet “need.” And sometimes, that institutional aid is used to incentivize enrollment for particular students who don’t “need” it. This latter application is often referred to as “merit” aid.
My frequent use of quotation marks here is intentional; as you’ll see, the term “need” is one built on a very shaky foundation, and thus classifying all institutional aid that is not “need-based” as “merit aid” is suspect, despite widespread criticism of the latter.
Before we dig too far down on that, a bit about the other programs. The state and federal grants, loans, and scholarships all provide cash to the institution. If your tuition is $15,000 and your student applies a $6,000 Pell Grant and a $5,000 state grant, and takes out a loan for $4,000, those direct costs are covered. Your institution receives $15,000 in cash. They’re not amounts you can change under most circumstances: A student who gets a $5,000 Pell Grant can take that to almost any college in the U.S., and will almost always get the full $5,000.
Back in the days when dimmer switches were on the floorboard, things were pretty easy: A student applied for aid, the college put the state and federal programs into a package, and sometimes had to use institutional aid to bridge the gap between what a student could pay and what the costs were. And for the most part, colleges could almost always do that, or at least come close. And then 1981 happened.
More about that in a minute. First, think about this: How much can you afford to pay to send a child to college? More important, how would you create a formula to calculate what other people can afford to pay for college? In general, of course, this is easy: Families with higher incomes and more assets should be able to afford more for college.
At the beginning of the federal financial aid programs, the government attempted to do just that, and the result has been problematic ever since. After you fill out the financial aid forms (the FAF or FFS back in the day, and the FAFSA now), the federal government attempts to calculate your eligibility for federal aid via a single number: the SAI, or student aid index. While that seems reasonable, somewhere along the way that SAI got turned into the EFC, or Expected Family Contribution—or, admissions and financial aid officers used to say, “the amount you’re expected to pay for college.”
The EFC was subtracted from total costs, and you got a figure called “need.” If tuition and fees were $2,940 like they were at public colleges in 1982, your EFC was zero, and your need was about $3,000. The maximum Pell was $1,800, and a modest loan of $1,200 per year would cover that expense if a state grant didn’t. And even if your EFC was higher and didn’t receive Pell or state funding, it was often true that summer jobs, on-campus employment, and family income were generally more capable of covering those costs. Many Baby Boomers like me worked their way through college.
Simple, right?
It’s no longer that easy, and it starts with that nebulous concept of the EFC, the basis for much of the discussion.
Here is some data showing the relationship between Family Adjusted Gross Income and the EFC. Hover over dots to see real-life examples. Find your income, and look at the EFCs. Follow the regression lines for families with one (orange), two (teal), and three (purple) children in college. And look at the range within any income band. You can see that it’s pretty variable, and, more to the point for most people, much higher than they expect.
Does it make sense that the average family with an income of $200,000 and one child in college would be expected to pay just over $42,000 per year? If you said no, you’re not alone. But this is where aid calculations start (and it’s often made worse by many high-demand colleges who use Profile, a product of the College Board, to uncover more assets that can raise the EFC even higher.)
That’s our first lesson: The whole basis for much of financial aid relies on this EFC calculation, but almost no one thinks it’s fair, or even accurate.
Just for fun sometime, sit in on a meeting where a financial aid officer tells a family that they don’t “need” any aid because they make $200,000 per year and thus should be able to write a check for over $40,000. In many cases, they “need” the aid some people would call “merit aid” to afford college. Where you sit is often where you stand.
Remember, the vast majority of institutional scholarships, especially at private colleges, are unfunded discount; this money is not money that you pull from a coffer, and that you could deliver to another, low-income student with genuine, recognized need. It only becomes an expense when it’s backed with the incoming tuition, thereby generating net revenue.
Circling back: Things for students and higher education seemed to be going along pretty well in the late 70s. Then, 1981 happened. If you were an adult in 1981, you may remember the massive tax cuts for higher-income people as a part of “supply side economics.” I’m no economist, of course, but it seems to me that it’s not a coincidence that a) college costs started to rise, and b) income distributions started changing dramatically. Some of that might have been Reaganomics, and some of it had to do with journalism. Yes, journalism.
Take a look at the two views on this chart. They show inflation-adjusted increases in the average cost of tuition, room and board at colleges in America, and inflation-adjusted income quintile bands over the same time. Before you dive down into the data, you’ll notice, probably, that the slopes are very different.
That’s the second lesson: Tuition has gone way up, and incomes haven’t kept pace, diminishing the abilities of families to pay for college.
Between 1968 and 1980, inflation-adjusted college costs actually declined before starting their meteoric rise. Since then, they’ve increased 168% and 136% after inflation (privates and publics, respectively). Over that same period, inflation-adjusted income increased by just about 25% for the two lowest income quintiles in America; even the bottom limit of the top 5% “only” rose by 110%.
That 1982 example, where Pell and modest loans covered most costs—and when they didn’t, some institutional aid could—is now just a fond memory. The gap between what families can realistically pay for college (let alone what the federal calculations suggest they might be able to pay) has grown dramatically.
At the same time family incomes started separating even further into the haves and have-nots, something else happened: In 1983, U.S. News & World Report issued its first college ranking issue. While the early rankings were strictly reputational in nature, eventually more quantifiable variables starting creeping in: Things like selectivity, yield rate, mean SAT or ACT scores, and even alumni giving rates soon became factors in the magazine’s calculation of “the best” colleges.
Resource: For fun, you might want to read Malcolm Gladwell’s take on college rankings from 2011, in case you were not already a skeptic.
Suddenly, the nature of competition between and among colleges changed. In a great example of Campbell’s Law in action, colleges began to produce the thing that outsiders were measuring them on. And if you remember my first post in this series about marketing, price is a powerful switch to throw to get markets to do things you want them to do. As early as 1984, this New York Times piece talked about Texas, where UT, Texas A&M, and even much smaller Trinity University were aggressively competing for National Merit students, using lucrative scholarships to attract them.
Competition for prestige among colleges led to price competition for students, much of which had to be paid for by tuition increases to generate more gross revenue. And lots of people at that time noted that rising tuition was driven by the Chivas Regal effect, creating the perfect storm of incentives to raise tuition much faster than inflation. It worked, at least for a while.
Then 2007 and 2008 hit, and suddenly, families had less cash and less home equity to use to pay for college. Stuck with high prices and the fear of falling demand, unfunded aid—not as an incentive, but as a survival tool—started increasing dramatically, especially at private colleges. In 2019, for instance, there were 37 private, liberal arts colleges with discount rates of over 60%, just in the five states surrounding the Great Lakes.
Resource: If you work at a private college, you can read about discount rates and look at your own institution here, using 2019 data, the most recent available in IPEDS at the time of publication.
If you find yourself still confused, don’t be ashamed. There is a highly complex, clearly imperfect, and at times dysfunctional relationship between the role of financial aid as a tool of access in service to students and society, and financial aid as a tool used (sometimes unethically) by colleges who think of it as a lever to effect their institutional prominence and position.
That line is not a fine one, however, and there is considerable gray area between the two extremes. I expect this will be a hot topic of conversation on my live Q&A webinar on August 26th, that you can register for here.
I’m looking forward to it.
