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Higher Ed's Changing Economic Landscape

Higher Ed's Changing Economic Landscape

April 10, 2008

Recent decisions by a number of our major private institutions are changing the higher education financial landscape significantly and quickly.

Both Harvard and Yale Universities have announced increasing financial aid to families making incomes up to $180,000 and $200,000, respectively. Stanford University has now announced that parents with incomes of less than $100,000 will no longer pay tuition, and parents with incomes of less than $60,000 will not be expected to pay tuition or contribute to the costs of room, board and other expenses. These universities, along with many others, also have eliminated or significantly reduced the need for student loans. At Vassar, we just replaced all loans with scholarship funds for families with incomes up to $60,000, and reduced the loan burden for families with incomes up to $70,000. What are the economics of these changes and do they signal a positive move for higher education and for society?

Families in the middle, not too poor and not too rich, have had a hard time paying for top private colleges and universities, even with financial aid. The recent decisions are aimed at addressing this. Where are these middle-income students? Most are going either to public institutions, where the price is low for everyone, not just those receiving financial aid, or to schools with significant merit aid. These students and their families will now consider a Harvard, a Stanford, or one of the top liberal arts colleges an affordable option. The Harvard and Yale changes benefit not just those in the middle, but families up to about the 95th percentile of the income distribution. The elimination of loans affects mostly middle income families, since many colleges had already reduced or eliminated loan burdens for lower income families,

My research with colleague Gordon Winston suggests that middle-income students are significantly underrepresented at the top private colleges and universities. Only about 20 to 25 percent of students at these institutions come from the middle 60 percent of the income distribution. And, there are plenty of talented kids in these families. For example, 50 percent of those scoring 1420 and above on the SAT and the equivalent on the ACT come from these families.

If the changes at Harvard and Stanford and other selective privates redress this at their institutions, what happens next? Presumably these institutions will enroll more of the middle and low-income students, and students that otherwise might have gotten in will choose colleges further down the higher education hierarchy. Is this a good thing? If you think the "best and the brightest" will benefit the most from a top university or college education, probably. And, the income distribution effects look progressive: More qualified lower-income students will displace higher-income students.

The students who are displaced are probably more likely to attend other privates, so the loser in this may be the publics. Talent will be even more concentrated at the top colleges and universities, but the socioeconomic background of the students will be more diverse. Is this good for society? I think it is. As educators I believe we should value opportunity based on talent, not on one’s family income.

An important issue for society is the amount an institution must spend to educate each student, not just how much that student is asked to pay. It seems likely that the wealthiest schools will pay for more generous aid by taking more money out of their endowments. Money is transferred to students from savings. Whether this is good for society depends on one's views of lowering the price for families today versus saving for the future. Clearly, some members of the Senate believe that the well-endowed colleges have been excessively privileging the future. And, shifting these resources to lower and middle-income families, rather than to well off families, looks more equitable too. (One could, of course, quibble with the definition of well off.)

How will other colleges respond? Already we've seen a number of private colleges reduce or eliminate loans from their financial aid packages. If colleges want to match the Harvard, Yale, and Stanford changes, which most other colleges and universities are not doing at this point except for the lowest income families, they either have to similarly spend from resources that otherwise would be saved (the endowment), or reduce expenditures elsewhere in the budget to cover the lost revenue of increasing financial aid.

In Vassar’s case, where we have adopted the more typical response of eliminating loan burdens for some families, we have increased our draw on the endowment to cover the increased scholarship, reducing savings. Through strong financial market returns (not likely this year!) and fund raising, we hope to minimize the impact on our endowment. Our decision to eliminate loans only for students with family incomes up to $60,000 was based on two primary factors: an endowment per student (at Vassar, about $360,000 per student compared to about $1 million per student at colleges including Amherst, Swarthmore, and Pomona) that is lower than some of the institutions that have adopted more generous policies, and the significant amount we already commit to financial aid. Like a number of our peer institutions, we adhere to a need-blind admissions policy (income is not considered in admissions decisions); and we have a higher share of students receiving financial aid (55 percent) than many other schools. Going further with loan replacement would have risked excessive spending from endowment or having to look for other expenditures to reduce.

Cutting expenditures can be problematic as a strategy to compete for good students, since that competition depends on both the quality of the program offered as well as the price. Other colleges with large endowments will compete by cutting price and maintaining other expenditures. Less wealthy colleges, which can't compete by drawing more from their endowments, won't. Instead, they will let Harvard and others corner the market for the top students and they will serve those next in the queue. The most talented students, whether rich or poor, will have the most spent on their educations and be asked to contribute the least.

Will this help reduce the frenzy surrounding admissions? Not likely. As long as the number of spots in the top schools remains more or less fixed, the frenzy will continue. In fact, if much of the hysteria is caused by concern about getting into the Harvards of the country, the frenzy will, in fact, increase. These changes will increase the number of kids applying to Harvard and Yale and Vassar and Bowdoin. Many of the qualified applicants from lower and middle-income families just wouldn't have applied before, knowing that even with financial aid, the financial burden was too high. Now, the price will be closer to that at the publics.

So, were these changes a good thing? For many of us, yes. We get more qualified applicants and more socioeconomic diversity. For the students who now can attend top colleges and universities? Yes, they get a great education at a price they can afford. For other colleges? Some will gain and others will lose. It all depends on where the students end up who would have gone to the Stanfords and Harvards before these policy changes. I suspect, at other top private schools. These schools will start seeing the talented higher income students who get bumped by talented lower and middle-income students from schools higher up the hierarchy. That isn’t all bad news – talented full pay students who previously would have gone to Harvard and Yale and Stanford. But, the cost may well be less diversity. The publics will lose talented middle-income students.

For society? The main change is that resources are being transferred from endowments to talented lower and middle-income families. That seems like mostly a good thing. And this trend may well prompt even more top private colleges and universities to take further steps to become more affordable and accessible. And that definitely seems like a good thing.

Bio

Catharine Bond Hill, a higher education economist, is the president of Vassar College.

 

 

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