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The Cost of Values

October 8, 2012

DENVER – It is often said that if you want to know what an institution values, see where it spends its money.

Several sessions and much of the chatter here at the annual meeting of the National Association for College Admission Counseling centered on how changes in the funding landscape for public universities – both the increasing dependence on tuition revenue to fund operations and the emergence of performance-based appropriations – could change the way admissions directors at those institutions recruit students and who they admit.

And the concern isn’t limited to public institutions. Tuition-dependent private institutions are showing increasing concern that, as educating students becomes more expensive, financial concerns could dictate admissions decisions. Wesleyan University announced earlier this year that it would consider need for a portion of its applicants, and Grinnell College announced last month that it is rethinking how it approaches admissions in an attempt to grow revenue.

The result, particularly for public institutions, is that they could place greater emphasis on students who can pay top-dollar at the expense of taking on “more risky” students – those who are less likely to stay four years, graduate on time, or pursue studies valued by state lawmakers. Particularly for public universities, that shift could potentially undermine what they see as one of their central goals – providing an avenue for socioeconomic mobility.

“A lot of institutions are asking ‘Can we afford our values?’ “ said Dan Lundquist, vice president for marketing and enrollment management at the Sage Colleges and founding principal at the Education Consultancy. “And the answer is no.”

Tuition Dependence

The most prominent shift in public higher education funding in the past decade – accelerated by the 2008 recession – has been the decrease in public expenditures on state colleges and universities. According to a report put out by the Delta Cost Project last month, per-student state and local appropriations decreased by 24 percent in research universities, 24 percent in master’s institutions, 20 percent in bachelor’s colleges, and 20 at community colleges between 2000 and 2010.

In response to the decrease, many public institutions have correspondingly increased tuition and fees. Rapid growth, sometimes doubling or tripling tuition rates in states such as California and Texas, has generated pushback from students, their parents, and the general public.

In many cases, increases in net tuition revenue – the amount of tuition money universities bring in after subtracting institutional financial aid – have just barely compensated for losses in state appropriations. In many cases, they haven't.

At many public universities, tuition revenue now exceeds state appropriations as a proportion of the budget. “In many states, net revenue is going to become the way we pay for what we want, not state support,” said Paul Hamborg, founder and president of Enrollment Research Associates, as part of a session on “the new normal” for public universities.

In that presentation, Michael S. Kabbaz, associate vice president for enrollment management at Miami University in Ohio, noted that appropriations compose only 11 percent of his institution’s budget. While that proportion might not seem out of line at an institution such as Ohio State University, which receives significant revenue from federal research, clinical fees, fund-raising, and corporate partnerships, Miami University has relatively little of that. More than 80 percent of the university’s budget comes from tuition.

Admissions directors here said that it is unlikely that state appropriations will return in the near term. Public sentiment in many states does not favor increased government spending, and colleges and universities must also compete with growing pension and health care costs. Potential decreases in federal research appropriations and student aid associated with deficit-reduction measures could also likely increase the dependence on tuition revenue.

“Lots of people have this notion of ‘the good old days,’ “ Kabbaz said. “We’re not going back to the good old days.”

Favoring the Favored

In a recent survey of college and university business officers conducted by Inside Higher Ed, about 71 percent of respondents said that increasing net tuition revenue was a major institutional strategy. Business officers at public and private master’s institutions and private baccalaureate institutions were even more likely to say they were concerned with increasing net tuition revenue.

Admissions directors here recognized that there is no hotter commodity in higher-education admissions these days than the “full-pay student,” who is (or whose family is) willing and able to pay the full price of tuition – an increasingly rare breed.

For public universities, the target group also includes out-of-state and international students, who are charged at higher rates than in-state students and often don’t qualify for certain forms of institutional aid.

Panelists noted that even if they discount out-of-state tuition to in-state levels, they are still making more off out-of-state students, since in-state students are likely also looking for discounts. 

In a recent survey of admissions directors, 45 percent of admissions directors at four-year public universities said they were very likely to increase recruitment efforts of out-of-state students, and 30 percent said they were very likely to increase recruitment of full-pay students.

The decline in state appropriations for campus construction also has ramifications for student recruitment. Because states are less likely to fund campus construction projects, institutions have to funs them by issuing their own bonds, and student demand plays a large part in determining an institution’s bond rating, and thereby the amount it has to pay in interest. Those institutions that tend to get high bond ratings are often noted to have high student demand.

Performance Funding

The second major trend in public college and university funding is the emergence of performance as a consideration in the allocation of state dollars to higher education institutions.

For decades, most states based their appropriations on enrollment, consciously or unconsciously prioritizing increased enrollment. When tuition revenue per student was low, per-student state appropriations provided a much larger payoff. From a purely economic standpoint, recruiting a new student was essentially as valuable as keeping one enrolled from freshman year to sophomore year.

In recent years, however, state lawmakers and system governing boards have begun adopting performance-based funding, often in response to disappointing graduation rates, to provide incentives for certain institutional behaviors.

Several states, such as Indiana and Ohio, now make a component of institutional budgets contingent on factors such as graduation and retention rates, course completion, STEM degrees, and enrollment and success of low-income students.

This shift generally favors students who persist, panelists noted. Because per-student tuition revenue has increased and per-student state appropriations have shrunk, the return on investment of recruiting a student who is going to stay four years and graduate at the end of that time has increased dramatically. Not only does that student likely bring in more net tuition revenue, he or she is also going to bring in performance dollars for retention, course completion, and graduating on time.

Kabbaz defined a tension between net tuition revenue, academic profile, and diversity that he said keeps him up at night. Increasing one often comes at the expense of the other two.

In general, performance-funding formulas favor enrolling students who come from affluent backgrounds, who have secure funding for all four years of college and who are well-prepared for college-level work, since such factors correlate strongly with completion.

On the other hand, students who enroll but don’t persist – those who tend to come from low-income backgrounds and struggle to pay for education – have become a much riskier proposition for some colleges and universities.

There are groups of lower-income students who persist, but Hamborg said it is difficult in the pre-admission phase for universities to determine which underprepared individuals will succeed.

In his presentation Hamborg laid out a situation in which a college was financially better off enrolling fewer students overall – particularly fewer low-income students – than enrolling its current academic profile, which was more evenly dispersed across income groups.

Who’s Favored

Admissions directors presenting at NACAC said these shifts are beginning to change how they approach their jobs. As noted in the surveys referenced above, colleges are beginning to put a lot more effort into attracting the students associated with higher potential revenue.

“We have to take on a suite of more sophisticated strategies to grow net revenue,” Hamborg said, noting that the changes have been a boon for companies like his that help institutions determine enrollment strategies and target particular students.

A separate presentation focused on ways for institutions to attract students it called a “good financial fit” for the institution – a euphemism for students who pay more.

Cappex, a site that tries to connect prospective applicants with colleges, conducted a survey of its users, focusing in particular on affluent students. When considering their top choice of college, affluent students and their parents value educational quality, the prospect of getting a good job out of college, and the opportunity to work with top scholars. In other words, they are willing to pay top dollar for what they view as a quality education.

For that reason, colleges have focused on communicating the value of the education they provide. Marketing has become a larger component of many institutions’ budgets.

But Cappex found that outside of their top choice, affluent families’ primary consideration was an institution's willingness to provide scholarships.

Alex Stepien, director of sales for Cappex, noted in a presentation that its often not net price that families are considering, but rather the amount of merit aid. For that reason, there are many colleges out there that have few, if any, students paying full price, raising tuition to high levels and giving partial scholarships to almost all students.

A recent survey by Sallie Mae found that affluent families are not willing to spend as much on higher education as they had in the past.

The financial fit presentation detailed a significant gap between what institutions thought affluent parents should contribute to their child’s education and what those parents thought. At the highest income groups, parents typically said they should contribute only about 24 percent of what the institution thought their contribution should be.

Admissions directors noted that one reason why recruiting high-paying students is so valuable is that they help institutions fund their values, such as providing access to low-income students. Private institutions without large endowments have long subsidized the education of low-income students by charging affluent families more than the cost of educating them.

Public institutions have started to engage in this process in recent years as well. Those institutions have run into some pushback, however. State policymakers in Virginia, Arizona, and North Carolina have publicly question whether it’s right for some students to “subsidize others” at public universities. The Iowa Board of Regents recently began a process to eliminate the use of tuition revenue for financial aid.

 

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