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Clearing up the confusion about financial aid.

WHEN TWO airline passengers, in adjoining seats, discuss what they paid for their tickets, it isn't unusual for each to find that the prices were significantly different. While students at colleges and universities may not yet be comparing the net price they paid for tuition, their parents most probably are. Just like seats on the same flight, the net cost of tuition, room, and board varies for different students at the same school. Confusion and frustration abound for good reasons.

At the heart of the confusion is the issue of financial aid: Where does (and will) it come from, who gets it, and why? These are important questions on every campus today, made even more compelling by the failure of Federal and state aid promised--but never delivered--to meet students' soaring financial aid needs.

Financial aid takes three basic forms: out-right grants or scholarships, short- or long-term loans, and student work-study. Financial aid may come from Federal, state, institutional, or private sources.

The amount of an award may be based on demonstrated financial need or the individual's "merit" as an outstanding student or athlete.

A generation ago, student aid was relatively straightforward. Economically disadvantaged students received Federal grants, low-interest loans, and/or subsidized campus jobs. At most colleges and universities, the impact of Federal funding, while available, was limited. In the late 1970s, the Middle Income Student Assistance Act was passed, providing additional grants and, more importantly, low-interest loans for non-economically disadvantaged students. During the next decade, the amount of Federal grants to students would peak and then begin to erode rapidly.

For example, at Cornell University in 1976-77, Federal funds provided seven percent of the grant aid to undergraduates. Following the adoption of the Middle Income Students Assistance Act, Federal support rose to just under 28% of grant aid by 1980-81. By 1992, Federal grants had fallen back to 11.6%. The case was similar at Hartwick College, a small, liberal arts school 70 miles from Cornell in the Catskill Mountains. In 1976-77, Hartwick received 13% of its financial fund grants to students from Federal sources. By 1980-81, that had increased to 23%, but fell to nine percent in 1992-93.

The history of state support for financial aid is similar, with one huge exception--the subsidy of public institutions of higher education. Depending on the state, public funds pay between 40 and 90% of the cost of attending a state college or university. States also provide direct financial aid to students enrolled in their own public colleges and universities, as well as to those in private institutions.

State financial aid support for private institutions is not new. Direct support for students in New York began as early as 1913, when the state established its Regent Scholarships and made them available to students for use at any institution. A Scholar Incentive Program was introduced in the 1960s, and the Tuition Assistance Program, its 1974 successor, was designed to "help to assure that [New York State students] were not deprived of a meaningful choice between private and public education." Others such as the Higher Education Opportunity Program gave special and significant financial aid to minority students. Many states have similar initiatives such as Illinois' Monetary Award Program, as well as self-help financial aid including work-study, which allows students the opportunity to work on campus for a modest wage.

Federal and state financial aid programs grew rapidly through the 1970s, reaching a crescendo in the early to mid 1980s. Since then, that support has all but evaporated, forcing many colleges and universities to dip deeper and deeper into internal resources to cover increasing costs. For example, Cornell University's institutional funds provided 55% of students' grant aid in 1976-77, but by 1980-81 only had to cover 40%. Today, this figure has increased to 63%.

The net result of recent and significantly diminished support from state and Federal sources for individual student financial aid has been twofold. First, colleges and universities find that, at the margin, increases in tuition yield ever-smaller net revenues. At Hartwick, for every $100 increase in tuition, $35 must be spent on financial aid. At Cornell, for every $100 increase in tuition and fees, about $37 goes for increased student aid.

Second, it has become increasingly difficult for families to plan adequately. The recent recession-induced family financial crisis was intensified to some degree by increases in college tuition. A student generally learns in early spring what his or her education will cost for the following fall semester. The general inability to forecast the net cost of college more than 12 months in the future makes it difficult for families to plan.

Planning is just as difficult for colleges and universities. A school that commits to a budget in January may find in the height of the spring admissions season that its actual needs for financial aid are 25-50% higher than originally anticipated. The result has been that even the best long-run financial plans at colleges and universities can be upset by situations far beyond their control.

Equally frustrating for colleges has been a simultaneous decline in endowment earnings, traditionally a prime source for financial aid support. Harvard University, with a $5,800,000,000 endowment, by far the largest in the country, has seen its investment income grow at half the rate of increase in financial aid. Hartwick, with a market value endowment of $58,000,000 and a student enrollment of 1,480, ranks in the upper 10% of the nation's colleges and universities in terms of endowment per student. Yet, even if every cent of endowment earnings were used to offset the college's $8,000,000 institutional commitment to financial aid, they would cover less than half. It is clear that schools must do something to relieve the burden on students, families, and themselves.

The Robin Hood effect

Return to the airline, where one passenger finds that the price of his or her ticket is twice that of the person sitting in the next seat. The person who paid more is getting the same service, so why not the same price?

Airlines compete for a limited number of passengers by discounting tickets. At colleges and universities, pricing is similar in many respects. Educational institutions often compete for students by discounting tuition through financial aid. This trend has been exacerbated by demographic trends and diminished Federal and state funding. As a result, colleges and universities were forced to increase the amount of institutional money allocated to student aid and have done so by re-allocating tuition income from full-paying students to those from poorer families.

The question arises as to whether this "Robin Hood effect"--taking money from the rich and redistributing it to the poor--serves to make college more expensive for all. In reality, the allocation of tuition money for financial aid lessens the price of a higher education for financial aid recipients and full-pay students alike.

Colleges and universities, just like airlines, operate with enormous fixed costs, most of which must be covered by tuition. When a college is operating at less than full capacity--with empty dormitory rooms and classroom space--the cost per student is significantly higher than when running expenses are spread over a larger number of students. Therefore, just like the airlines, colleges will adjust discounts to optimize the number and revenue of students attending and, at the margin, lower costs for all students.

This airline analogy holds true for all but the very elite schools. These colleges and universities could fill every freshman class with full-paying students. They have made the decision not to do so. Instead, the Ivy League schools opted to seek the very best students, regardless of financial need, thus preserving their market niche. Now, even the Ivys are "trapped" in the financial aid spiral.

In the past few years, some Ivy League schools and other top-flight institutions have met to determine how much financial aid they should offer students who are accepted in more than one of these prestigious institutions. The Justice Department blew the whistle on this "Overlap Group," which included all the Ivys and MIT, charging them under the Sherman AntiTrust Law of 1890 with conspiracy to establish set prices. The case was settled out of court with all but MIT, which decided to bring it to trial. MIT lost, but appealed.

In an article in the Brookings Review (Winter, 1993), William G. Bowen, president of the Andrew W. Mellon Foundation, and David W. Breneman, a visiting professor at Harvard's Graduate School of Education, took the Justice Department and the court decision to task. They argued, effectively, that the decision against MIT actually may lead to less financial aid being given to highly qualified, low-income students. The reason is that most prestigious colleges and universities must treat financial aid as an operating loss, rather than a discount on price. The difference may seem nebulous, but it is important. Because prestigious schools need not necessarily discount price in order to assure a full freshman class, their meeting to set financial aid packages is a rational approach to avoiding a price war for the top students, which, while assuming significant financial aid for them, would mean less money for others.

(Recently, the Appeals Court held that the Federal trial court should have considered MIT's claim that the overlap meetings actually furthered competition and served vital public policy goals.)

Unlike airline tickets, where travelers can purchase any discounted ticket meeting their needs, the amount of financial aid (discount) a student receives usually is dependent upon family income. Every year, tens of thousands of students submit a Free Application for Federal Student Aid form (FAFSA). This is evaluated to determine how much a family should contribute to a student's education based on income, assets, expected summer earnings of students, and other family circumstances. Financial aid is calculated on the difference in the total cost of attending a college or university and the amount of money expected from the family. Financial aid "packages" then are developed by each college to which a student has applied. The packages consist of scholarships and grants, and self-help programs such as loans and work-study.

Today, most selective colleges say that they make "need-blind" admission decisions. That means that a student is admitted to an institution regardless of his or her financial aid needs. Many colleges pledge not to "gap." That is, they will make up the difference between what the family can afford to pay and what the school costs. As state and Federal funds for financial aid declines, the commitment not to gap is becoming a luxury that few institutions can afford. Already, Smith College, Brown University, and others explicitly have said that ability to pay will play some role in admission decisions. Many other colleges and universities, while still saying that they do not gap, are allocating relatively scarce scholarship and grant monies to students with the highest academic profiles, while giving more self-help loans and work-study to less capable ones.

This trend is particularly harmful to members of minority groups. Their progress in the past 25 years is due, in no small part, to the availability of Federal, state, and other financial aid. Minority students historically are more dependent on financial aid. Further, the decision of the Department of Education under Pres. George Bush to declare special financial aid for minority students as discriminatory only can exacerbate the situation, though there are signs that the Clinton Administration is reversing this policy. Primarily because of the potential adverse affect upon minority group members, the National Association of College Admissions Counselors reaffirmed their group's belief in need-blind admissions by a resounding 113-41 vote in 1993.

The Clinton Administration, acknowledging that financial aid issues are significant to Americans, has suggested several changes. The first is the establishment of the Federal Direct Student Loan Program. Through it, colleges agree to shift all or part of the $2,800,000,000 in annual student loan volume from banks and intermediary financial institutions to the Federal Treasury.

The concept is intended to simplify the loan process, thereby lowering loan costs to students and, in theory, to the schools. Reaction among colleges and universities to date has been mixed. While 1,100 of the nation's 3,500 institutions have signed up for the preliminary phase of the program, many others are worried that they can not handle the additional volume of paperwork that would be required under the program.

Federal control ahead?

Other education leaders wonder out loud if Direct Student Loans to colleges and universities will be the first step in a Federal control of tuition prices, and thereby the quality of higher education. There is precedence for such concerns. In the 1960s, when the first broad-based Federal loan program was proposed, Congress assured colleges and universities that it would come without strings attached. Later, however, the Federal government rationalized that colleges could be forced into compliance with Title IX (Equal Rights) because they received Federal funds in the form of aid for their students. The Clinton Administration is examining "reasonable cost standards," the amount of money that a student should pay to study at a particular kind of college.

Another, more visible effort of its plan to restructure college aid is a program allowing students to exchange as much as $10,000 in college loans for up to two years of community service. This innovation holds some promise for filling some of the void created by declining participation of state and Federal financial aid sources. On the other hand, many in Washington feel that it may become a substitute for or dilute the major Federal aid programs such as Pell Grants, Stafford Subsidized Loan Program, Federal Supplemental Educational Opportunity Grant, Federal Work Studies, and Federal Perkins Loan.

Still another innovation may be a requirement that 20% of Federally funded work-study monies be used for student community service. While no one can deny the laudability of programs that provide incentives for students to engage in community service, this would come at the expense of student work on campus. Work-study programs have become an increasingly important part of colleges' efforts to reduce costs, as students are substituting for much more expensive full-time clerical employees and others. Schools may be forced to hire more full-time employees to replace work-study students, thereby raising costs and creating a need for more, not less, financial aid.

A number of colleges and universities are attempting to address portions of the financial aid dilemma in individual and innovative ways. For instance:

* Hartwick College has instituted an incentive-oriented conversion loan program. Students who maintain an average of B- or better have their loans converted to grants.

* Monmouth College in Illinois has adopted an innovative financial aid program. Academically qualified students immediately receive a $5,400 award against a comprehensive fee of $16,800. Additional awards are given for students completing a FAFSA form. Monmouth also pledges to hold tuition increases in future years to three percent annually for first-year students.

* Santa Clara University in California has adopted a "competitive pricing plan," which ties financial aid increases to the rate of inflation within the last 10 years.

* Huston-Tilloston College in Texas has stopped spending instutitional funds on financial aid except for about $200,000 in endowment income. The school has chosen to try to hold the line on raising tuition instead.

In addition to the vast and public financial aid system, there exists another, also publicly funded system that benefits those who can afford college, rather than those who can not. Heavily taxpayer-subsidized public colleges and universities accept students with no bearing on their family's ability to pay. It is not unusual for high-income families to enroll their students at UCLA, the University of Texas, University of Wisconsin, or any other state-assisted/supported institution. These students from affluent families are free to enjoy heavily subsidized education, paid for at taxpayers' expense.

A more rational approach to financing higher education would be to allow the price of tuition at public institutions to approach real cost, as it does at private institutions. Savings from public funds then could be redirected to aid based on financial need of a student, rather than a much more arbitrary basis, such as in which state a student can claim residency. This high-cost/high-aid model is working at some pilot schools, notably Saint Mary's College of Maryland.

In the long run, allowing the tuition at state-subsidized institutions to approximate real cost and using the resulting savings for real financial aid needs may be the only answer to solving the nation's pending financial aid crisis. The problem is so large today that colleges' internal redistribution of tuition dollars, precarious balance of need-blind admissions policies, and even seemingly bold steps such as remission of loan payments for community service are, in the long run, the fiscal equivalent of rearranging deck chairs on the Titanic. A much more aggressive, cogent policy is needed if higher education is to remain within the reach of all eligible students.
COPYRIGHT 1994 Society for the Advancement of Education
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1994 Gale, Cengage Learning. All rights reserved.

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Title Annotation:college costs
Author:MacDowell, Michael A.
Publication:USA Today (Magazine)
Date:Sep 1, 1994
Words:2824
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