The student aid conundrum: right now, it may feel like damned if you do, damned if you don't. But clear analysis of your financial aid mission and adoption of an action plan can deliver solid benefit to students and school. (Strategy).

A dip in the economy is hard on everyone, but for higher education, hard times are aggravated by a kind of triple whammy of financial need: When the economy dips, more parents and students are out of work, and more investments shrivel. The result: Colleges and universities are asked to meet more financial need. State legislatures, faced with eroding tax revenues and increased demands on the state coffers, cut funding to education. The result: less money to meet the increased student need. Colleges and universities, for their part, tend to respond to decreased resources by raising tuition, sometimes sharply, increasing the gap between the price of education and what families can afford to pay.

The whammy doesn't necessarily stop at triple. For schools that have endowments, asset value drops, and with it, the amount available for payout. Worse, trustees often ratchet back endowment spending even tighter than spending formulas would dictate, figuring that no matter what you originally intended, a rainy day is no time to use the money you've saved. And a weak job market can push many would-be workers back to school; for some schools, especially community colleges, rising enrollments can eat up even more scarce financial resources.

More need and less money to fill it. Whenever the economy dips, that's the prospect faced by most colleges and universities. And as students and families feel the pain, they turn unfailingly to the one spot in the institution that ought to be able to help them: the Financial Aid office. What's the best way for the Financial Aid office to respond? University Business spoke to some top experts in financial aid, enrollment management, and the economics of higher education. Here's what they had to say.

Challenges Across the Board

The crucial point to remember, says Williams College economist Gordon Winston, a noted scholar of the economics of higher education, is that different sorts of institutions face vastly different challenges. "The publics, the wealthy privates, and the not-so-wealthy privates are three totally different worlds," Winston says. "One of the troubles, of course, is that we use the term `financial aid' to mean radically different things. It can mean price discounts to get customers or improve student quality on the one hand, or it can mean income redistribution policies on the other hand, and they're very different things. Those three different populations are in very different circumstances, and the toughest are the circumstances faced by private, not-awfully-wealthy private institutions that have been shading price to improve quality or to maintain quality in the face of others shading price through merit aid. Schools like this are increasingly running up against declining endowment returns and are really getting a squeeze. If the question is what are they supposed to do, I'm damned if I know."

What makes it even harder for schools to cope with economic hard times, Winston says, is that so many institutions refuse to acknowledge what kind of financial aid they actually engage in. "There's an awful lot of unclarity," he says. "A lot of social respectability and panache goes with having only need-based financial aid. That's what the good guys do. So everybody has a strong desire to treat their own financial aid as if that's what they are doing. But, in fact, they're doing student enrollment management. They're cutting prices and modulating deals for superior students, and trying to steal good students from other schools. That makes it very hard to talk about a financial aid policy. You refuse to admit how much your old policy has been abandoned, because it's embarrassing. You don't really want to be one of those tacky people who cuts price to lure students. But, on the other hand, when someone else is cutting their price and luring your students, you don't want to let them get by with it."

"The real difficulty," explains Macalester College President Michael McPherson, who has written and consulted extensively on financial aid, "is that the financially prudent ways for schools to respond to that kind of difficulty often wind up hitting hardest on the folks with the highest need. Think about public universities and colleges. Understandably, when they see a sudden drop in the contributions from state government, their inclination is to push for a substantial tuition increase so they can keep their programs going. A lot of people, particularly at flagship publics, can afford those kinds of tuition increases pretty easily--you have some pretty affluent people going to low-cost institutions. The people who can't handle it are the high-need students.

"It's sort of a law of life in a society like ours that the people who end up taking the hit are the low-income, high-need people," says McPherson. "That is true in the public sector and to some extent in the privates as well: If you're trying to get extra revenue to compensate for endowment losses, one way to do it is to give less aid to high-need students and use more on middle- or upper-middle-income students, where it may have more leverage. If $10,000 will enable two middle-income students to come to your school but only one low-income person, you can stretch your dollars that way. It makes sense from the point of view of the institution, but it may mean that it may interfere with its mission, and if you add it up over all the schools, it certainly reduces opportunity for high-need students."

Institutional funds are important, but in the long run, the source of financial aid that can be the most volatile--and can make the most difference--is state aid, argues Edward St. John, professor of Educational Leadership and Policy Studies, and Director of the Indiana Education Policy Center at Indiana University. "The research shows funding for state grant programs is an important predictor of access. It has a huge impact. If you think about it, federal aid is even-handed across the country. States have a greater impact on equalizing opportunity because the purchasing power of federal grants has eroded. Private colleges have adapted pretty well to this policy environment. They have no problem raising tuition to give for aid, as long as they continue to have philanthropic support. Public universities have limits, however. If they raise tuition to give more grants, they're really replacing tax dollars with tuition and using the tuition revenue to aid other students-they really are taxing one group of students to subsidize another group. There is a social justice dilemma when they follow this path toward privatization by raising tuition charges for student aid, especially for merit aid."

Not to say that all states do a good job of helping out when the economy gets tight. Indeed, in most states, aid reliably drops every time tuition--and need--in creases. In some states, as tuition goes up, aid goes up. Minnesota has generally done well. So has Illinois. Other states are trying to adjust for financial conditions, but mediated through the politics of state.

When the states don't come through with aid, though, and schools try to compensate, there's always a question as to what the actual effects will be. That's especially true when the strategy in question is discounting price to keep up enrollments. Kathy Kurz of the consulting firm Scannell-Kurz explains, "We have some clients for whom we developed econometric models to look at the price sensitivity of their students. In some cases, we found that whether they go in and make up the money [lost by falling state aid] or not, their net revenue is going to be reduced either way. If they make up some of the state money and keep the students, they've spent that extra money. If they don't, then the students don't enroll and they lose it that way.

"A lot of what's happening," says Kurz, "is institutions trying to respond to individual circumstances in the hope that the family circumstances will get better. That may be a pretty good bet, but what about things like reductions in state funding, whether in the form of a scholarship and grant program or in the form of subsidies to public institutions? In those cases, there may be a new base being created. There may not be a return to what we had before."

Action Plan for IHEs

The problems higher education faces in providing financial aid can seem cosmic. But there are some things institutions can do to protect themselves, and help students, say the experts:

Work from data. "Making decisions in the absence of any kind of analysis is a mistake that we often see" says Kurz. "Many institutions shoot from the hip, whether it's arbitrarily capping the discount rate or arbitrarily picking a tuition increase and not really analyzing what it's going to mean in terms of retention or yield rates. I think more institutions are trying to become data driven, but we still see institutions that haven't approached these questions analytically at all"

Monitor the way appeals are handled. When the economy gets tight, more students and parents appeal the packages they have been offered. The National Association of Student Financial Aid Administrators" Dallas Martin estimates that appeals have increased by between 10 and 20 percent this year. There's a temptation to grant many appeals, hut is that a good strategy? "Institutions have moved more and more toward a `let's make a deal' or `price is right' attitude," says Kurz, "and, of course, you get more appeals in times of economic downturn. Ironically, many times those are the students whose propensity to enroll is the highest, because they've gone to the trouble of appealing. While there often needs to be some response, what level is the right level of response is often not discussed analytically at the institution."

Think about retention, "Some institutions will burden folks with a huge financial deficit early on, or they'll bait and switch," says enrollment management consultant Jack Maguire. "We had a client that would give good financial aid packages to entering students but would switch to more self-help in junior and senior year. We were able to show them that the issue of retention wasn't being addressed by this policy."

Pay attention to the pool. "An institution that's achieving its enrollment goals has apparently addressed affordability as a goat," says Tom Williams of the enrollment management consultancy Noel-Levitz. "It has achieved equilibrium tuition, discounting, and profile. But if an institution raises tuition and does not simultaneously account for that change by recruiting more affluent applicants, it can expect a loss of revenue. An institution that doesn't know that is in danger of flux in revenue or quality."

Preserve aid by cutting costs. "The premium," says Macalester's McPherson, who has been chairing a cost-cutting committee at his own campus, "is on having an intelligent process, with a lot of buy-in around the campus, which actually helps you to make some tough-minded changes, and that can be quite a positive thing. What's tough is that you end up hurting individuals who care about the institution and whom you care about, and that's no fun, but the larger cause may be served well by that kind of tough scrutiny. The other thing that's important and adds to the challenge, is: Just because you're cutting, you can't stop investing, so you actually need to cut more than the number of dollars needed to balance the budget. You need to cut enough to be able to free up enough resources to do interesting things. Otherwise, it's really bad for morale, and in the long run, it's going to harm the institution in terms of fulfilling its mission, and in terms of its competitive position."

Remember that loans are cheap today. In the end, many institutions will have only one real alternative in dealing with increased financial need: recommending more loans. That may not be a desirable alternative, but at least the market today is favorable to borrowers. "I'd rather see people do without this and that, or try to tighten their belt a bit and not go into debt," says NASFAA's Martin. "But the value of your education and the return on the investment is going to be such that it's worthwhile to borrow. And if you're going to have to do that, it's a good time to borrow, because we're at an all-time low in terms of interest rates on students loans."

Look for a way out of the box. Says Paul Gilroy, president and CEO of Proeducation Solutions (www.proed.org), "If we look at net price as the sole means by which we decide whether college is affordable, we're locked into a finite number of solutions. [But] college affordability is a two way street: Can the family afford us, and can we afford the family? The traditional approach focuses just on price, and if you adjust the price up or down, either the family or the school does worse. There's seemingly no way out of the box, and that's where higher ed is stuck. In the long run, that strategy doesn't work. The way to go is to address affordability and lessen the impact on families and institutions." Gilroy's own solution is a loan program in which the school diverts funds it would have used for grants, to creating a subsidized alternative loan program. The program has had promising early results, but it is especially interesting because it shows that there are still unexplored alternatives in approaching the problem of affordability.

Remember who you are. "I would say that the combination of tuition and financial aid policy that a school follows is I very important to how it's perceived in the marketplace," says McPherson. "A school that's need-blind--that's a very important feature which is important to communicate to your constituencies. And to jerk those policies over short-term fluctuations threatens an important asset. I think it's important to strive to be consistent. If you're known for treating students well at all income levels and valuing a diversity of economic circumstances in your institution, to walk away from that to save some bucks for a year or two is likely to be a mistake because it will have lasting impacts on how people perceive who you are. You can delay plans for a new building or you can even delay some kinds of maintenance for a few years without doing any lasting harm. But if you start messing with your core policies, you're sending a very confused message to the marketplace, and you risk undermining the trust of your constituencies."