Moneybox

The Single Most Important Thing to Know About Financial Aid: It’s a Sham

Colleges claim to award scholarships based on merit or need. In reality, they’re just charging the most they think families will pay.

A young man scratches his head as he looks at a piece of paper. There is a dollar sign that looks like a university logo behind him.
Photo illustration by Natalie Matthews-Ramo. Photo by Monkey Business Images/iStock/Getty Images Plus.

In early March, a 17-year-old high school senior I’ll call Ethan got a text message from Ursinus College, a small, private liberal arts school located about 45 minutes outside of Philadelphia. It said, “Great news, [Ethan]! Ursinus College has awarded you additional money! Log into your portal to view your updated financial aid award.”

A few days later, Ethan got a letter from Ursinus repeating the same offer. “The Office of Student Financial Aid recently received additional information regarding your application for financial aid and, as a result, a change has been made to your original award,” it said. In December, Ursinus had offered Ethan a “Gateway Scholarship” of $35,000 to offset the college’s listed price of more than $72,000 for tuition, room, and board. Now it had added a “Grizzly Grant” (Ursinus’ mascot is a bear) of $3,500 to the mix.

Advertisement
Advertisement
Advertisement
Advertisement

It was puzzling. Ethan is not financially needy. One of his parents is a nonprofit executive and the other is a public school teacher in suburban Maryland. They own their home outright and earn well over $200,000 per year, putting them comfortably in the top 10 percent of household income nationwide. Ethan’s standardized test scores were good and grades were fine, but mostly not in the kind of rigorous Advance Placement–type classes that are mandatory for admission to selective universities.

All of this was in the application he sent to Ursinus last year, and he hadn’t talked to them since. What “additional information” were they talking about?

Meanwhile, Ethan has a cousin who is also a high school senior. I’ll call her Ashley. Her overall academic profile was better than Ethan’s—higher grades and lots of AP courses, somewhat lower SATs. But her economic circumstances were not. Ashley also lives in Maryland. Her mother, a single parent, dropped out of community college and works in the back office of a local restaurant chain. Her income is well below the median for someone with college-age children, and she has no real financial assets to fall back on.

Advertisement
Advertisement
Advertisement

Yet Ashley wasn’t getting unsolicited text messages offering her more financial aid. Penn State, a public land-grant university that allegedly has a mission to provide broad access to college, had recently sent her a financial aid letter. Like Michael Corleone in The Godfather Part II, their offer was this: nothing. Tuition, room, and board would be $49,200—almost $16,000 more than private Ursinus College wanted to charge her wealthier cousin. To pay, she was welcome to get a job, or take out loans.

Ethan and Ashley were learning a lesson about the way the business of higher education actually works in this country: College financial aid is largely an illusion. Government financial aid is real, if inadequate—federal Pell grants and state appropriations to reduce tuition at public universities definitely exist. But the financial aid purportedly provided by colleges themselves is mostly fiction.

Advertisement
Advertisement
Advertisement

The whole public-facing system of college admissions—in which admissions decisions are based on rigorous academic standards and financial aid is supposedly provided to those who are most academically and financially deserving—is an elaborate stage play meant to flatter privileged families and the reputations of colleges themselves. The real system, hidden behind the scenery, is much closer to the mechanics of pure capitalism, driven by an industry of for-profit consultants and relentlessly focused on the institutional bottom line.

Advertisement
Advertisement

That’s a huge problem for students and parents trying to make expensive, life-changing choices about higher education. Many families make bad decisions based on the misleading vocabulary colleges use around financial aid, leading to broken futures and, increasingly, unaffordable student loans. If you have children and are planning to help them go to college anytime soon, understand this: Much of what colleges are going to tell you about money isn’t true.

Advertisement
Advertisement

There are, to be sure, a few extremely wealthy institutions that really do provide financial aid. If you are among the small number of low-income students that Harvard chooses to admit after filling much of its class with legacies, athletes, and the children of wealth, status, and power, you won’t have to pay tuition. The Ivies and a handful of other elite schools have “need blind” admissions, which means they consider your application regardless of your financial circumstances, and offer generous aid to those who need it.

Parents can also find good, reasonably priced public options in some states, which allow them to avoid the shell games involving financial aid. Public universities in North Carolina remain very affordable, for instance. And some states also provide grants to students that are in fact based on their financial needs or academic achievements. Tuition and fees for the State University of New York system are relatively low to begin with, roughly $8,000 to $10,000 for in-state students. But the state of New York also runs a state need-based scholarship program that, combined with a federal Pell grant, can be enough to cover tuition and part of room and board.

Advertisement
Advertisement
Advertisement

But if you live in a less generous part of the country and your kids are applying out-of-state, or they have their sights set on a private college without an Ivy League endowment, then you have wandered into a very different kind of market, one that has a lot more in common with airlines hawking seats or dealers selling cars than you might realize.

The language of admissions and financial aid suggests that colleges review every application with two questions in mind: “Does this applicant meet our academic standards? If so, how much scholarship aid, given their financial circumstances and academic merit, do they deserve?”

In reality, the large majority of undergraduates attend a college that accepts most or all applicants. And while the “sticker price” for tuition at some institutions exceeds $50,000, most colleges don’t have enough market power to charge anything close to that. For them, the real concerns are, “How likely is this applicant to enroll, if we accept them? And what’s the most amount of money they’d be willing to pay?”

Advertisement

To answer those questions, many colleges hire expensive consulting firms to help them manage a complex process of marketing, admissions, and pricing. The firms design social media campaigns and produce the flood of glossy brochures that pours through the U.S. postal system every year. They take the wealth of detailed financial information that parents are required to disclose on the Free Application for Federal Student Aid, or FAFSA, and feed it into the same kinds of complex algorithms that airlines use to constantly change the price of seats in the months, weeks, and days before a flight.

Advertisement
Advertisement

They also use a probabilistic strategy for deciding whom to admit, based on a combination of how much they think parents are willing to pay and how likely students are to enroll. Because of online systems like the Common App, it’s easy for students to apply to many colleges. At less desired colleges—the safety schools and fourth choices—“yield” rates, meaning the percentage of admitted students who enroll, are often below 20 percent. So they admit 3,000 students to fill a freshman class of 600 and hope that past statistical patterns hold. If too many students enroll, there’s no room in the dorms. Too few, and the college goes broke.

Advertisement
Advertisement
Advertisement

The whole process is called “enrollment management.” To understand how important enrollment management is in the higher education industry, look to administrative hierarchy: Ursinus College, for example, has a director of admissions who reports to a vice president and dean of enrollment management and marketing.

When Washington College mailed Ethan three “VIP admission” tickets and an all-access lanyard with his name printed on it for an “Admitted Students Day Music Festival” in April, it was trying to increase its yield. When one college after another sent Ethan a letter offering him tens of thousands of dollars in scholarship money, in most cases it probably had nothing to do with their evaluation of Ethan’s achievements. It was more likely because market research told them that students like the feeling of being awarded something, and the enrollment management algorithm suggested that full tuition minus $25,000 or $30,000 was a price his parents might be willing to pay.

Advertisement
Advertisement

The Ursinus College Office of Student Financial Services did not receive any additional information regarding Ethan’s application. That was a fib. An Ursinus spokesman confirmed for me that the extra award was based on his original application and “other financial considerations.”

It would not be surprising if those “other financial considerations” included a report from an enrollment management consultant—the firms Ruffalo Noel Levitz and EAB are two of the biggest—showing that acceptance and pricing projections as of early March were looking soft. When colleges find their enrollment numbers lagging, they act like a car dealer with too many of last year’s models on the lot, and put tuition on sale. Like most colleges, Ursinus’ $72,000 list price is an imaginary number; on average, it charges students only about one-third of that. It is not providing Gateway Scholarships and Grizzly Grants from a pot of actual money. It’s just pretending to, because that’s what students and parents like to hear.

Advertisement
Advertisement

Colleges, unsurprisingly, are shy to discuss the consultants that shape the inner workings of their aid process, and will resort to linguistic contortions when asked about it. When I asked Ursinus whether it awarded its “Grizzly Grants” based on a report from an enrollment management consultant, a spokesman responded that it works “in partnership with a financial aid leveraging firm” and that “we monitor the progress of the first-year class on a routine basis throughout the enrollment cycle.”

Advertisement
Advertisement

A spokesman from Clark University, which tried to entice Ethan with a “$68,000 Robert Goddard Achievement Scholarship,” told me that the school “does not rely on an enrollment management consultant.” Instead, they said, it “occasionally” hires “outside analytical support” that does “not tell us how much aid to offer any student or group of students” but does “crunch large volumes of data in a timely manner that we then use to assess our progress toward our enrollment goals and estimate/project our total aid expenditure through that enrollment cycle.”

Advertisement

So, not an enrollment management consultant. Just, you know, a consultant that helps them manage enrollment.

But while schools may not love talking about it, nothing about this system is a secret within higher education. For instance, after taking a job in the enrollment management industry, former Ursinus vice president for enrollment Richard DiFeliciantonio wrote an essay for Inside Higher Ed in which he explained that the “financial aid matrix” colleges rely on is essentially “the same pricing technique taught to M.B.A.s and commonly used by corporations for commercial products.” He noted that the formula considers a student’s academic achievement mostly as a “proxy” for their willingness to pay for college (as opposed to a measure of merit).

Advertisement
Advertisement

Those charged with meeting enrollment goals, as higher education leadership must be well aware, routinely speak in terms of commodity, customers, net revenue, yield funnels, econometrics, automated behavioral marketing, creative destruction, signaling, outcomes, positioning, disruptive adaptation, and obligations ratios. If they fall back on pieties of public good and intellectual advancement, they are quickly brought to heel by business-honed trustees.

Advertisement

This is also why, despite her financial need and solid high school achievement, Ethan’s cousin Ashley was not being inundated with texts and letters offering her more money. As DiFeliciantonio wrote: “Wealthy families are more able and less willing to pay for college while the poorer families are more willing and less able.” In other words, parents of means who themselves have finished college are often sophisticated consumers of higher education and are able to drive a hard bargain, whereas lower-income, less-educated parents feel an enormous obligation to help their children move farther up the socioeconomic ladder and blindly trust that colleges have their best financial interests at heart. So colleges obey the algorithm and offer more financial aid to the Ethans than to the Ashleys, one of many problems identified in a recent Brookings Institution report.

Advertisement
Advertisement
Advertisement

Ashley submitted financial aid forms with information about her family’s modest income because everyone and everything about the process told her college aid is based on how much money you need, or deserve. She had no idea that information could be used against her. In May, New York University offered her admission if she would agree to delay enrollment until spring 2023—when, maybe not coincidentally, her good-but-not-stellar academic record would not count in the rankings data NYU submits to U.S. News & World Report. Their price? $79,070. Their aid offer? $0, take it or leave it, with 96 hours to respond.

Federal statute limits how much the Department of Education can lend to undergraduates. Freshmen can only borrow $5,500. But there is no limit on how much the department can lend to parents through a program called Parent PLUS. Nor does the department check to see if parents have the means to pay PLUS loans back. So NYU “offered” Ashley the opportunity to borrow $5,500 and take a $1,500 work-study job. Then it offered Ashley’s mother the chance to take out a $72,099 Parent PLUS loan—more than her gross annual salary, before taxes—for the first of four undergraduate years.

Advertisement
Advertisement

Fortunately for Ashley and her mother, they knew someone who offered sensible financial advice. They turned down NYU and its offer of gargantuan loans and chose a less expensive public university. But as the countless individual stories that compose the nation’s $1.7 trillion student loan crisis show, many families make different choices. They are drawn in by a combination of optimism, blind faith, and familial obligation, and end up with debts they cannot repay. Colleges know this will happen.

Colleges do this because they want and need money. The business of filling up a class has gotten more difficult as the number of new high school graduates continues to recede from the peak millennial years, with further declines expected starting in 2025. Small, private colleges are especially vulnerable, and some have gone bankrupt in recent years.

Advertisement

Understanding the true nature of the college market should reduce some kinds of student stress. If you’re a high school graduate in reasonable academic standing, there are scores of good colleges ready to admit you. The real market tuition price in the big middle of the higher education sector is probably about $25,000, not the $50,000 or $60,000 you might have heard. Applying to college there isn’t like being vetted to join an exclusive social club. Nobody is really judging your worthiness for financial aid. College is just another service with a price.

The words colleges use in the admissions process, embedded in the broader portrayal of higher education in popular culture, tell a different tale, leaving first-generation students with the least money and social capital most vulnerable to exploitation. Colleges are full of great educators who want to help you learn. But when it comes to money, you’re on your own.

Advertisement