The Link between Financial Aid and Enrollment

By June 4, 2015 March 7th, 2019 Trusteeship Article

As we emerge from the extreme financial pressures of the Great Recession, it is time for board members to take a step back and think about long-term strategies for ensuring that financial-aid policies are consistent with institutional mission at the same time that they serve fiscal and enrollment goals.

All boards are aware that enrollment numbers are critical to the institution’s long-term stability. It is common to ask whether small increases or decreases in the number of students might improve future prospects. Perhaps a lower enrollment goal would increase academic quality and selectivity and put less pressure on the financial-aid budget. Perhaps a higher enrollment goal would bring in needed additional revenues. But there is no doubt that the number of students—and particularly the number of tuitionpaying students—is a vital variable to monitor.

Financial-aid policies may be more obscure to many board members. By now it should be understood that because of the discounts offered to students, net tuition revenues are lower than gross tuition revenues— and it is only the net revenues that can fund the activities of the institution. But the nuances of financial-aid policy and its relationship to mission and enrollment goals are less transparent.

While board members can determine these policies only at the broadest level, it is important that they understand the issues, provide constructive guidance, and clarify institutional priorities. What are some of the questions boards should be asking about financial aid as it pertains to enrollment?

What is the relationship between tuition and financial aid?

When institutions raise their tuition prices, they are likely to spend more on needbased financial aid because of the larger gap created between ability to pay and sticker price. They may also spend more on non-needbased aid, designed to encourage students with particular characteristics to enroll.

Institutional grant aid creates a gap between the sticker price and the net price students actually pay to institutions, as well as a gap between gross tuition revenue (tuition times number of students) and the net tuition revenue the institution actually receives. Increases in institutional grant aid may reduce net revenues by simply lowering the prices students pay, or it may increase net revenues by bringing in more students.

Of critical importance, increases in financial aid accompanying tuition increases are sometimes so large that the institution does not generate any new net tuition revenue. It is net tuition revenue— not the amount of financial aid or the percentage of gross tuition dedicated to financial aid—that determines financial strength.

Why do institutions charge different students different prices?

The awarding of institutional grant aid leads to different students paying different prices. Some students pay less because their financial circumstances make it difficult for them to pay. Others pay less—although they could pay the full price—because the institution is providing a discount in an effort to influence their decision about where to enroll.

This is a pricing pattern that economists call “price discrimination.” Price discrimination is not a bad thing. Some students can easily afford the sticker price, and would be able and willing to pay even more. Some institutions have long waiting lists of students willing to pay their sticker prices. Most of these are highly selective, nationally known, private institutions or flagship public universities. These institutions discount their prices to attract different students than those who would enroll without financial aid. They want the best students they can get, and many of those students simply cannot pay on their own. They may also want students with particular capabilities who will be drawn in by financial aid. For those institutions, financial aid is an expenditure made to shape the student body.

Many other institutions would have empty seats if they did not discount so generously. If they lowered the sticker price enough to fill the class, their total revenues would be too low to operate. But if they can draw in some full-pay students, while charging others a lower price—something close to the maximum each student is willing and able to pay—they can fill their classes while taking in adequate net revenues.

Would it be better to simplify the pricing structure by lowering the sticker price and reducing the number and value of the discounts offered?

Many board members (and many other interested parties) are frustrated by the complexity of the pricing structure at colleges and universities and would like to know if there is a better model available. Some of the alternatives to consider might be:

  • Lower the sticker price for all students and reduce financial aid;
  • Raise the sticker price and increase financial aid;
  • Promise students that the sticker price will stay the same for four years;
  • Promise students that the sticker price will rise by the increase in the Consumer Price Index (CPI) or by CPI + 1 percent or + 2 percent every year;
  • Promise need-based aid recipients the net price they pay will stay the same for four years (or increase by the CPI).

Some colleges and universities have implemented one or more of these strategies, but there are no magic bullets. (See, for example, “Sewanee’s Tuition Guarantee.”) Each institution must carefully examine its circumstances to find the optimal path. Institutions that discount for almost all students are more likely than others to seriously consider lowering the sticker price. Institutions facing uncertain nontuition funding streams face greater risk if they make promises about future tuition levels.

What is the difference between need-based aid and non-need-based or “merit-based” aid? Do these types of aid have different impacts on enrollment?

The term “merit aid” is frequently used to refer to any institutional aid that is not based on financial need. Sometimes it really is merit aid and is limited to the students with the strongest academic credentials. But sometimes it is just “non-need-based” aid, going to all or most accepted candidates.

The line between need-based aid and non-need-based aid is not so clear. Some institutions, particularly the most selective ones, allocate all of their institutional grants on the basis of financial need. Students with the most-limited incomes and assets get the most-generous aid packages, and those deemed able to pay the full price on their own are expected to do so. With relatively small percentages of applicants accepted, the reward for merit is the acceptance itself.

At other institutions, while supporting students who cannot afford to pay on their own is the primary purpose of financial aid, institutional grants are also used to increase the probability that students who can pay will choose to enroll. There may be merit awards for those with the highest test scores, for those with particular leadership skills, or for musicians.

Another model, which is increasingly common, is to give institutional grants—or discounts—to the vast majority, or even to all of those who are accepted. These “merit” awards are not really based on merit. They are just bargaining chips designed to increase enrollment.

Institutions that give the most-generous grants to students with the highest test scores or the best high-school GPAs may be heavily subsidizing relatively wealthy students, while leaving lower-income students to fend for themselves. But many non-needbased awards go to students who actually do have financial need. So if we ask what percentage of the aid budget is allocated based on criteria other than need, the answer is a larger number than if we ask what percentage of the aid dollars go to students who could afford to pay without assistance.

Should “need-blind admissions” and “meeting need” be goals for most institutions?

Over half of the four-year colleges and universities in the United States accept at least 75 percent of their applicants, so the question of whether or not financial circumstances should affect a student’s probability of admission is relevant for a limited number of institutions. However, for those colleges and universities in a position to use the admissions process to shape their classes, it is a very important question.

The issue sounds straightforward. It’s hard to argue that it is fair or desirable that colleges and universities whose goal it is to provide educational opportunity to students who can make the most of the experience should turn away applicants because they can’t afford the tuition. Rather, financial aid should support these students. In fact, knowing the challenges of growing up in disadvantaged families, neighborhoods, and elementary and secondary schools, it would seem reasonable to be more favorable toward low-income students than to those from more privileged backgrounds with the same grades and test scores.

But many institutions find that they have more qualified applicants with financial need than their budgets will support. Accepting candidates without meeting their financial need means either that they won’t be able to enroll, so the acceptance is not meaningful, or that they will enroll and face serious financial problems. It seems more responsible to turn them down. Most “needaware” institutions accept most of their class without regard to financial need, but when they get to the marginal admits, they look for those who can pay.

How are institutional enrollment and aid policies related to the growing concerns about student debt?

Press coverage of student debt is quite misleading. It is not uncommon to read about a student who borrowed $80,000 or $100,000 on the way to a bachelor’s degree. Buried in the article might be a reference to the reality that among the 70 percent of bachelor’s degree recipients who graduate with debt, the average amount borrowed is about $30,000. Among 2011–12 bachelor’s degree recipients, about 5 percent had accumulated as much as $60,000 in debt. Less than one half of one percent borrowed $100,000. The real question is: When students borrow money to enroll in your institution, do they end up better off than they would have been making another choice?

If many students borrow and don’t graduate, or if many students graduate with more than $40,000 or $50,000 in debt, the institution has some real soul searching to do. Why are students borrowing so much? Are they getting an education and a credential that makes it worth it? What could the institution do to mitigate this problem? It’s not just that the Department of Education and Congress have started to look more closely at institutions with many students who have high debt levels. It’s also that some institutions may be leaving their students worse off than they found them. Higher education’s mission certainly goes beyond increasing students’ lifetime incomes, but it is irresponsible and unethical to put students in a situation where they pay so much for college that they never see financial benefits.

How should institutions think about the shift in the national conversation from college access to college success?

As recently as 10 years ago, people concerned with unequal access to higher education across demographic groups and the population’s overall level of educational attainment devoted all of their attention to college access. The concern was that the price of a college education excluded too many people from disadvantaged backgrounds. Public and institutional policies, therefore, should do as much as possible to correct this problem by subsidizing these students and bringing prices within reach.

While the access question remains very real and quite challenging, attention has broadened to focus more on college success and degree completion. We have done a much better job of getting students from all backgrounds into college than we have of supporting them in achieving their goals. Too many students leave college without a degree, and the gaps in completion rates across income groups are larger than the gaps in enrollment rates.

Board members should pay attention to their institutions’ retention and graduation rates and consider the causes and implications. Besides the fact that the federal government is focusing on this issue and making the information public, institutions will not accomplish their missions if students leave without credentials of value.

Do institutions have to choose between a commitment to equity and access or a focus on efficiency and fiscal stability?

If an institution succeeds in winning desirable applicants from peer institutions by offering non-needbased aid, the peer institutions are not likely to sit by idly. They will offer competitive packages. It is easy to see how competition for these students can lead to a price war, depleting institutional funds without bringing any more qualified and well-heeled students into the applicant pool. Everyone will lose in the long run—except those lucky students who could have paid full price, but who now enjoy lower net prices than even students from the lowestincome families. Those students without the ability to pay will simply drop out of the pool, and collectively the institutions will not be able to improve the quality of the students they enroll.

In fact, equity and efficiency frequently reinforce each other, both from society’s perspective and for the individual college or university. Equity dictates that each institution provide the best possible education to the students who are qualified to enroll—regardless of ability to pay. That means making need-based aid a priority—possibly at the expense of institutional prestige, some campus amenities, programs, or other worthy expenditures.

Efficiency means making decisions that allow the institution to provide as much quality education as possible at the lowest cost possible and ensuring that the institution has a strong bottom line in both the short term and the long term. Rising in the rankings might be a good way to attract more applicants. Providing discounts to students who could afford to enroll elsewhere to draw them to the campus might increase net revenues. Ensuring financial strength is a prerequisite to providing equitable opportunities. In other words, a focus on equity does not mean ignoring efficiency. And a focus on efficiency cannot exclude equity.

Conclusion

Institutional financial aid serves multiple purposes. Without this assistance, students from disadvantaged backgrounds, and even many from middle-class households, would be unable to enroll. If these students do enroll, but receive inadequate financial support, their chances of succeeding in college are reduced, and if they do graduate, they risk accruing excessive debt.

But financial aid is not just about supporting students who cannot afford to pay. Grants—or discounts—also influence the enrollment decisions of students with financial means and multiple options. Board members should be part of the conversation on campus that defines enrollment goals, priorities for financial aid, and the principles on which decisions about unavoidable tradeoffs should rest.

Financial-Aid Leveraging

Enrollment managers are active participants in the financial-aid process and the practice of leveraging financial aid to enroll and retain students. As college costs continue to rise against relatively stagnant household incomes, the pressure on institutions to provide more financial aid from their operating budgets has also grown.

Boards and institutional leaders should be asking these questions: Is the institution spending too much on financial aid? Is it being spent on the right students? What is the balance between net revenue and the discount rate? How do our financial-aid strategy and policies reflect our institutional values? Do we use aid appropriately to assist with student persistence and retention? Should students who are achieving high levels of academic success be rewarded and encouraged to remain enrolled with additional scholarships?

A strategic analysis of financial aid can help provide the sometimes-elusive answers to these questions. It can also lead to an improved financial-aid strategy, which is an important component of attracting and retaining the students the institution seeks to serve.

Many campuses focus on financial-aid leveraging to yield their incoming class, but fewer consider ongoing analysis to keep current students enrolled. If an institution had a significant increase in tuition, for example, did it examine all students’ financial need and make necessary adjustments, or did it adjust only the need-based awards of incoming students to ensure that enrollment met stated institutional goals? Numerous studies have proved that it is cheaper to keep an enrolled student than it is to recruit a new one. Campuses should include financial aid in the student success and completion conversation and evaluate financial-aid awards to make sure financially challenged students remain enrolled.

From What Board Members Need to Know about Enrollment Management, by Jim Hundrieser (AGB Press, 2015).