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Cost of Free Money

August 30, 2012

It takes a lot of money to make college inexpensive.

Administrators at Long Island University, a private university in New York with multiple campuses, had to make budget cuts and are dealing with faculty pushback after the financial aid awarded by one of the college's two main campuses exceeded the budgeted amount. Administrators overspent in an effort to meet enrollment targets and meet demonstrated need.

The university does not have a large endowment, so most of the aid came in the form of discounted tuition, meaning the college likely will not bring in as much in tuition revenue as expected. Administrators said the campus in question, referred to as the Post campus, did not have procedures in place to account for the financial aid awards relative to the budget.

“Existing business processes at Post did not effectively track the level of funds either committed or accepted by incoming students,” wrote President David Steinberg in a letter responding to an inquiry by the president of the faculty union. “By late fall 2011 it became clear that we were over-expending financial aid resources.”

Administrators said they won’t know how much was lost on financial aid until the budget is completed. But while the loss is likely a small fraction of the university’s more than $440 million total annual budget, faculty union leaders say it increases stress on an already thin budget, costing them potential raises.

Long Island is one of several institutions in recent years to over-award financial aid while trying to build a certain class profile. The University of Louisville’s law school announced in July that it had awarded $1.39 million in scholarships for its incoming class this fall to the incoming class after budgeting only $550,000. In 2010, over-awarding of financial aid was a large component of Birmingham-Southern College’s budget troubles.

What happened at Long Island and other institutions reflects a growing concern about affordability among the general public. A recent Sallie Mae study found that students and parents are more likely than in the past to take cost into account at various points in the college application process. As a result, colleges have engaged in "bidding wars" with one another, offering increasing amounts of aid to attract students.

An annual survey by the National Association of College and University Business Officers released earlier this year found that net tuition revenue -- the amount that colleges bring in from tuition after aid is factored in -- has flattened out over the past few years despite increases in sticker prices.

“The trend of increased financial aid to attract students in a more competitive market has already eroded net tuition revenue growth for the majority of our rated profile,” wrote Moody’s Investors Service in their mid-year evaluation, written in late July.

Standard & Poor’s also noted in a recent report that the increase in financial aid spending will cause problems for non-elite colleges and universities. “As the U.S. continues to recover from the Great Recession, the institutions with the largest endowments will best be able to afford increases to their financial aid budgets while many others will find historical rate increases to be unsustainable, which may ultimately force management teams to make difficult decisions and changes over time regarding their enrollment profile or operational model,” the report states.

Paul H. Forestell, provost of the Post campus, said the increase in aid spending is a problem affecting tuition-driven universities across the country as families struggle to pay for college, students become more consumer-oriented, and colleges struggle to figure out exactly how to distribute financial aid to bring in the revenue they need.  “What is happening is that there’s a greater need for sophisticated analytics to better leverage scarce financial aid dollars,” Forestell said. “When you’re a tuition-driven school, it gets challenging to stay away from those dangerous margins.”

Cost of Making a Class

Forestell and Steinberg said a number of factors played into the college's awarding of financial aid. The administrators said the students they deal with have adopted a more consumer-like approach while considering admissions and financial aid offers. Forestell said he sees students playing colleges against one another for better aid offers, students who don't qualify for aid seeking scholarships as a badge of honor, and greater competition from surrounding schools.

The Post campus has also been struggling to meet enrollment goals since 2008. The campus's overall enrollment has fallen from 8,771 in 2008-09 to 7,305 in 2011-12. Much of that decline has been in the College of Education, which used to be a revenue engine for the campus. “We’re right in the middle of the economic crisis that’s hit everywhere,” Steinberg said in an interview.

Steinberg said the university expanded in the 1980s and '90s, adding physical space and tenured professors. Despite fewer students enrolling, the college is still saddled with those costs, he said. Since tuition is the university's primary revenue source, the college has tried to use scarce aid dollars to grow enrollment and ultimately bring in more money.

These various factors led administrators to rethink the financial aid strategy. The entire university's spending on financial aid rose from $66 million in fiscal year 2009 to more than $100 million for fiscal year 2013.

While administrators at the Brooklyn campus, the college's other major campus, anticipated an increase in student need and and asked for a steady increase to their financial aid budget over several years, the Post campus did not. Instead, as admitted students brought in larger financial aid offers from competing colleges, Post administrators tried to match them, eventually exceeding the budget.

"You're trying to make the best gamble possible to leverage dollars you have," Forestell said. "What you don't know is whether you'd be even worse off if you hadn't made the gamble." Forestell said he hopes the increased offers for freshmen will result in greater retention that will eventually make up the difference.

Forestell said his campus is taking steps to minimize the loss associated with the financial aid awards. The campus is strictly enforcing deadlines for accepting offers and making budget cuts.

Steinberg said the cost of the over-awarding financial aid is isn't yet clear, but faculty estimates put it at about $8 million. He said the financial aid awards are only one area of financial concern for the university. Others, such as falling short of enrollment targets, might prove to be a larger problem.

Steinberg said the university made administrative changes at the Post campus and put budget controls in place to prevent the college from overspending in the future. He added that college is thinking of new programs and ways of generating revenue that could help the college balance its budget if enrollments do not return to pre-recession levels.

The university’s faculty union called for an independent investigation of the process of awarding financial aid. “We live in a time when every employee is told (and some have been told for years) that there is no money available for the raises that, at best, simply maintain one’s standard of living,” wrote Union President Edward J. Donahue, a professor of chemistry and biochemistry, in a letter to the president. “It is therefore utterly unconscionable to find that the University has mistakenly disbursed a sum of money which, in total, could provide a 4 percent raise for every single employee.”

Steinberg categorically denied any wrongdoing by university officials and the faculty’s characterization of the financial aid spending as a “mistake.”

“Whether budgeted in advance or allocated elsewhere throughout the admissions cycle, both Brooklyn and Post must do everything within their power to meet the needs of our students,” he wrote. “Our mission compels us to do so.”

Not Alone

Earlier this year, the University of Louisville’s Brandeis College of Law gave out too much in scholarships for its incoming class. Traditionally, a committee of faculty members reviews applications, said Mark Hebert, a spokesman for the university. Hebert said that it appears that the procedure was not followed this time. The college is in the middle of investigating what happened, and Hebert said that investigation would not be concluded for several weeks.

The law school agreed to cover the cost of the excess financial aid. As a result, the law school’s interim dean has embarked on a significant fund-raising drive to help cover the cost. Administrators have said that if the money cannot be raised, the law school might have to reallocate funding from scholarships for next year's class or other programs.

Several law schools have increased the amount of aid they offer in an attempt to enroll classes with higher test scores and grades -- factors that could increase rankings. Hebert noted that Louisville's class this year has better test scores and grades than previous classes and is also more diverse.

Representatives from the National Association of Student Financial Aid Administrators said overspending on financial aid is not a common occurrence, and that they have no evidence that there is a trend.

 

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