May 30, 2012

The End of Financial Aid Leveraging?

By Gary Daynes, Senior Strategy Consultant

Nearly every institution of higher education in the US leverages financial aid. That is, we all give different amounts of aid to different students to encourage them to attend our institutions. The practical impact for students is that classrooms, like airplanes, hold customers who are paying radically different amounts for the same seat. The result for campuses, at least in theory, is that the institution realizes as much revenue as possible while still filling its class with qualified students.

There is solid research in behavioral economics, and plenty of lived experience to suggest that financial aid leveraging has worked in the past. But my sense is that it may not work well into the future. Here is why.

Our ability to leverage financial aid depends on a set of beliefs among students and their parents:

– general assumption that higher education is a good value and a specific belief that the particular institution where a student will enroll is worth the cost,

– a willingness to pay money (or to borrow money) to make up the difference between aid and cost of attendance,

– a willingness to overlook the fact that each student pays a different amount for the same education, a difference based largely on the student’s prior academic performance (and slightly on their actual need).

The institution has to have a different set of beliefs:

– that students will come even if pricing is unclear,

– that the particular model of financial aid leveraging is both financially and morally defensible,

-that the model of leveraging maintains or improves the overall quality of students at the campus,

-that the class of interested students will be academically and financially varied enough so that students who pay a lot are numerous enough to subsidize those who pay little.

It is fair to say that every one of the assumptions above is under question right now. One need only consider the move of major research universities into online learning, the uproar about student loans, the explosion of parent appeals of financial aid packages, the outrageous financial aid packages given to top academic students (who, of course, usually come from families with greater means to pay for higher education), and the changing demographics of new college-going students–to recognize that the landscape that once supported leveraging is radically changed.

Schools have two options to respond–they can stay the course, hoping that while the national mood undermines the assumptions behind financial aid leveraging their own markets will be willing to go along. Or they can move, as a first step, towards clarity in pricing while they figure out exactly what their education is worth to the families who want to buy it.

Option two demands something more than changing tuition, particularly for small institutions. It demands that we re-calibrate where we stand in the market and who are the students who are most likely to succeed at the college. Gone are the days when small colleges could get by on a pitch about small class sizes and an academic program that looks a lot like that offered at big universities.