College Guide

Blog

October 31, 2010 11:00 AM The Problem with Financial Aid

By Daniel Luzer

That whole “need blind” philosophy isn’t working out so well for many schools.

According to a piece by Dan Berrett in Inside Higher Education:

Imagine walking into a pricey hotel and telling the desk clerk that you intend to stay the night, but are willing to pay only as much money as you have in your pocket at the moment.
That is the prevailing assumption underlying how students and their families pay for expensive, private higher education, a group of admissions and financial aid officers said here Thursday morning at the College Board’s annual forum. The model isn’t sustainable — for families or colleges.

In the last 25 years, the cost of private college has gone up at a rate twice as fast as the rise in household income. In 1988 the average family spent 22 percent of its annual income on college; it spends more than 50 percent today.

But a college can’t keep offering more and more generous financial aid if the institution lacks the cash to keep up with its own higher pricing. And that’s the problem many of them have; their investments simply aren’t paying out the way they used to.

So many colleges are compromising. They used to be need blind and promise to meet need. But now Colorado College is “need sensitive,” which means the school considers if the student can pay when making its admissions decision. At Embry-Riddle Aeronautical University the school tells students who can’t afford the university not to come, or to come later.

Apparently need blind has become unaffordable for many colleges. But then, they got themselves into this hole, didn’t they?

The trouble is that colleges are concentrating on the wrong aspect of the model. It’s not actually the generous financial aid that isn’t sustainable; it’s the cost of tuition.

This financial aid shell game always seemed a little odd to me. Financial aid, which started out as a laudable way of helping poor families afford college, has become a competitive game of how much aid you can from what colleges. This is despite the fact that financial aid distribution, much like the sticker price of college, seems arbitrary.

When I interviewed former George Washington University President Stephen Joel Trachtenberg for the piece I wrote about college rankings earlier in the fall he said that an effective university financing strategy was to increase the price of tuition but, essentially, decrease the number of students forced to actually pay that tuition. “Some 40 percent of students pay list price,” he said. “These are people from wealthy families; I have no compunction about charging them list price. They can afford it.”

Interesting. So it appears it’s not really need blind that’s the problem so much as it is cost blinding, deliberately obscuring the true cost of education. Instead of charging what it actually costs to educate students, colleges annually set tuition at some arbitrarily high number, which some families can certainly afford, and then the rest of students pay for college with grants and loans.

This makes sense, but there are few other markets in the world that work like this, charging rich people more because they can afford it and then calling the cheaper price paid by the less affluent a generous scholarship. I pay $2.05 for a medium cup of coffee at Starbucks. If someone gets paid ten times more than me should he pay $20.50? Well no, he, like me, should pay what it costs.

The trouble with this current discussion is that because colleges can no longer afford to guarantee to meet the need of all their students to pay tuition, they will simply enroll less poor students. It would seem equally logical, and far more appropriate in these financially trying times, to stop raising tuition so drastically. You don’t have to offer the scholarship if the school is affordable.

Now obviously tuition can never really go down. There are going to be struggles, for both families and colleges, in coming years. But pundits, politicians, parents, and even college administrators have worried for years about the escalating cost of college tuition. This was one of those problems about which “something must be done.” But no one had to take responsibility for it. Now it’s time to take responsibility.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

Comments

  • Ken on November 01, 2010 12:12 PM:

    Thanks for this article and some critical thinking. The numbers from the college board report reveal how costly college really is. It is true that no other market place exists that is quite like Higher Ed. The middle Class gets squeezed the most as they do not qualify for financial aid, but do not have the cash to ust pay the bill.

  • Barbara on November 01, 2010 6:25 PM:

    It is certainly a conundrum, and I agree that tuition increases are unsustainable and the product of wasteful college spending on "non-core" facilities.

    However, what you are describing has a name -- price discrimination. Other industries do engage in price discrimination. Airlines charge a lot more for the same flight if you book it the day before you leave, want the option of a refund, and otherwise hew to business travel standards.

    And then, there are people who will only buy clothing or other goods when they are on sale.

    The other wrinkle is that even those paying "full" tuition are likely not paying "full" cost of their education. It probably depends on the institution.

    So I agree that the lack of price transparency is generally not the best system, but it doesn't particularly bother me that the way to get a good deal is to get a university to offer you the deepest discount, some doing so purely on merit and others on need. It bothers me a good deal more that students take on mountains of debt to go to the school of their choice.

    But I agree that the "true" problem is affordability.