April 29

Financial Aid: Buying Student Talent

By John V. Lombardi

One of the more interesting features of the current enthusiasm for discussing college costs and the elaborate mechanisms to discount tuition and fees for various classes of students at elite institutions is confusion about the process. Some approach this conversation as if it were about dramatic changes in the opportunities for poor but smart high school graduates to attend elite institutions, previously out of reach. Although this may end up as a result for some, the manipulations of the financial aid process are actually about how to buy student talent more competitively.

The process of discounting tuition for desirable students is a well-understood and longstanding practice of most institutions, elite and non-elite. Sometimes the process involves what we call merit aid, used to buy desirable students without regard to their personal or family financial circumstances. In other circumstances we use need-based aid to buy desirable students at prices scaled to match their financial capacity. While the mechanisms differ in terms of how we calculate the price we will pay for a desirable student, the purpose of the exercise is much the same in both circumstances.

To entice the student to enroll, we offer to pay a stipend based on need or merit which the student can apply to the cost of attendance. If we are indifferent about getting a student to enroll, we do not provide any kind of stipend. We also calculate the amount of merit or need-based aid that will prove sufficient to entice desirable students to enroll in our institution rather than in another. We need to engage in this competitive practice because the number of truly desirable students is limited and the demand for their participation in our institutions is strong.

The virtue of need-based financial aid as a mechanism for buying students is that we can calibrate the amount we have to pay to get the student based on a standard methodology for determining need. Then we offer the exact amount of need-based aid that will permit and encourage the student to attend. However, need-based aid only serves to buy talent from a pool of students who have financial need. Another pool of desirable students may not have any financial need, but nonetheless we want to buy their talent for our university. So we use merit aid. We will often find that success in purchasing the attendance of first rank students requires a combination of need-based and merit aid. By manipulating the amount we pay, we can buy just the right combination of student talent for our ideal student body profile.

If we need women, we can use our aid funds to buy more talented women; if we need football players, we can buy those; if we need minority students, we can buy the mix we want; if we need a number of less wealthy students, we can buy just the number desired; or if we need engineering students, we can pay just enough to attract them. For small private elite institutions, this process is a highly specific activity because the number of students each college enrolls each year is quite small. For an elite college of 2000 students, perhaps 600 new students are needed each year. If we want to have 30% of them defined as “needy” and the definitions used can be quite generous, then we need to find 180 students from families with incomes under the definition (maybe 120K annual income) who also have exceptional qualifications and talent, and then using various forms of financial aid buy them for our student body.

Although there are surely noble motives involved in opening access to elite expensive institutions to individuals of great talent who might otherwise not have been able to afford the price of attendance, there is also a clear competitive advantage to doing so. If we have a large endowment made possible by our not-for-profit status and the quality of our institutional offerings and the generosity of our alumni and friends, we may find it effective to spend some portion of the endowment earnings to subsidize the acquisition of highly talented individuals who come from an economic status that is less than substantially well off, if not actually dramatically poor.

The competition among elite institutions for individuals of talent and for the public prestige associated with doing good while doing well requires institutions to emulate and publicize their programs for subsidizing on a need basis the purchase of students. This publicity generates a great deal of discussion, but actually changes the competitive landscape little. A few students who might otherwise not have been able to afford an expensive elite education can now do so without incurring debt. But these students are almost always talented students, and since the definition of “needy” for many elite institutions includes much of the middle class, they are not necessarily from financially challenged circumstances.

In all of these discussions, whether conducted in the rarefied atmosphere of billion-dollar endowed private colleges and universities or among selective public institutions, we must continually remind ourselves that none of this is about the cost of higher education, only about the price to the student. Indeed, as we expand the support for need-based or merit financial aid we do not reduce the cost of higher education, we increase it because the funds used to discount the price paid by desirable students must be added to the basic cost of running the college or university. As a result, the competition to provide more and better aid to some students is yet another example of the increasing cost of competition among selective institutions of higher education in America. It may be good thing, but it isn’t free.

Comments

Can This Kind of Honesty Beat Back the Coming Storm?

BRAVO for this kind of transparency! I have spent 15 years telling college-bound families that colleges “buy” the students they want using financial aid. What colleges to understand is that my families are “shocked” when they read this piece. It was NOT what they had been led to believe about the system. Revelations like this makes families and their representatives question other things colleges have told them. There is now skepticism about the need for tuition increases at twice the rate of inflation, tax breaks and alumni giving campaigns when there is a multi-billion dollar endowment generating 20% plus rates of return! I want to see more information like this so we can avert the cliched “perfect storm” where the price, the value, the results, and the endowments are going to become a target for the media and the legislature. The time for “we know best” secrecy is behind us. I personally have no problem with fin aid being used to attract students. It is the real world where employers will “pay more” for the employees they want and need. I see nothing wrong in colleges “paying more” for the students that they feel help them achieve their goals. I know many hard-working FinAid officers who try to balance the need of the student with the need of the school. Putting together a program that is attractive enough without giving it all away is a challenge. The problem is the pretense that the financial aid system is mechanical and “blind” and that these kind of “games” do not exist. U Penn President Amy Gutman was on the Wall Street Journal TV on 5/4/08 breathlessly explaining how their new program would make college more affordable for the middle class (http://www.upenn.edu/pennnews/amy_gutmann_news.php) She made it sound like it was something new and was a noble sacrifice on the part of the Ivies like U Penn. What she didn’t say was most of the families would have qualified for these programs BEFORE the new announcement based on need. Sorry, replacing $19,000 in Stafford Loans with grants does not look like a noble sacrifice to most people when you are sitting on $6.6 BILLION in endowments, earning 20% ROI and charging $50,000 for anyone not qualified for aid! She tried to justify the $50,000 price tag for families who did not qualify for aid with “it’s worth it” because of small classes and how the U Penn “brand” will be so valuable that they will get it back faster. She then made a plea not to touch the $6.6 BILLION dollar endowment using a “we know best” argument. I’m sorry but the entire interview came off as self-serving and a tad patronizing. There is a reason why Congress, the IRS and private attorneys are sniffing around these multi-billion dollar endowments and peeling back the Ivy curtain to see if family’s are “getting their money’s worth". Her attitude was NOT the right touch. We need the truth about the process and not PR rhetoric that is so obviously a defensive move. I am the daughter of a Dean and have spent half my adult life working with family’s to help them pay for college. I have no problem with colleges spending more on some of my students than others based on desirability. I DO have a problem with the colleges not being open about the process.I hope this begins a discussion about how colleges can WORK WITH their families to make college affordable and “reward-able” for good students.

Linda P. TaylorCollege Funding Network

Linda P. Taylor, Founder and President at College Funding Network, at 7:55 pm EDT on May 12, 2008

Sunshine and Evaluation as Remedies

Thanks to Inside Higher Ed for publishing the excellent analysis of John V. Lombardi, who knows whereof he writes, and to Linda P. Taylor for her comment, “The time for ‘we know best’ secrecy is behind us.... The problem is the pretense that the financial aid system is mechanical and ‘blind’ and that these kind of ‘games’ do not exist.”

If anything, the problems are even worse than described, because the practices are also wasteful of federal tax dollars. Consider that when an institution effectively raises its net price for a capable but less desirable Pell-eligible student or a GI bill-eligible veteran, it is countervailing the intent of Congress to help such students. It is no wonder that despite the billions Congress pours into federal programs, these demographic groups are collectively no better off. In fact, many are worse off as they have been saddled with excessive debt to pay for the higher prices institutions set in order to pay for the institutional grants and discounting necessary to play the student aid games. Most institutions do not have endowments large enough to engage in these practices without raising tuition to pay for them.

There are two readily available remedies that either Congress or the Department of Education could apply immediately. The first is transparency. The Student Right To Know Act already requires that institutions open their student financial aid records to students, including “criteria for selecting recipients from the group of eligible applicants and criteria for determining the amount of a student’s award.” This would include algorithms used by institutions to rearrange aid packages. The remedy is immediately available. As Linda Taylor suggests, many of these practices cannot stand sunshine and institutions would abandon them as knowledge of how they work becomes public. If colleges have invested in them and consider them proprietary information, too bad. Federal law and the national interest must trump secrecy about how federal, charitable, and tax expediture programs are undone behind closed doors.

The second remedy is evaluation. Under the Education Sciences Reform Act of 2002, the Department of Education is required to perform research and evaluation on its student financial aid programs. Currently, the Department does no scientific evaluation and, if asked, could not answer the question of whether increases in federal grants decrease reliance on federal loans, for example. Only a handful of academic researchers around the country look at such issues. Their consensus: there is little evidence that the programs are effective as currently operating, for whatever reason.

These remedies can and should be applied immediately to end this sorry situation.

Jon H. Oberg, at 11:25 am EDT on July 12, 2008