When the cost of College doesn’t cover College costs

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Swirling around the debates over the high sticker price of higher education is a deeper conversation about the broken financial model that most colleges and universities continue to use to pay their bills. While the largest universities have more options based on the scale of their endowment, fundraising prowess, and research support, most public and private colleges are heavily tuition dependent.

State governments have been withdrawing their historic support for public colleges and universities. These institutions now increasingly rely on tuition, fees, and room and board to pay their bills. Each passing day, their finances look more like private colleges.

That’s not a good thing if higher education is to develop a sustainable financial model. Private colleges rely heavily upon a tuition model that presumes that a family pays based upon their ability to do so — that is, wealthy families should not expect to receive financial support from the college that their child attends. The stated goal behind the model was to improve access and encourage diversity in all its forms by making college more affordable for students who qualify for support. They do so through financial aid discounting practices that places the burden of support on full-pay families to pay for the discount.

College Financial Aid Model No Longer Useful

Today a new reality has set in, based principally on the fact that the student financial aid model has run to the end of its useful shelf life. Until the early 21st century, it was possible for financial aid administrators to cobble together financial aid discounts, state and federal support especially for public colleges, and loans of various types to make a case to families about how they could afford to pay for college. But cracks began to appear in this practice as the gap widened between what colleges could piece together and what families could afford to contribute.

At some colleges and universities, including often those of very good reputations, the financial aid discount now exceeds 70 percent. It is possible to imagine a scene where their student residence halls will be full but the comprehensive fee received will no longer sustain the enterprise.

The number of “full-pay families” — those who can pay the full comprehensive fee — is decreasing along with the willingness of families to send their children to high sticker-priced colleges. Many of these colleges did not meet their fall enrollment targets in September 2017. Further these institutions often rely on merit scholarships, now extending into the wealthier income brackets. Wealthier families brag about the merit scholarships they receive to encourage their child to attend the college they selected.

When admissions officers calculate financial aid offered to the “set asides” for Division I athletes, academic programs, and special circumstance candidates of various types, there is very little flexibility remaining in a financial aid budget.

Tuition and Fees Aren’t Enough to Cover College Expenses

This aid budget depends on the institution’s ability to meet general college expenses through tuition and fee increases. But this is where the crisis occurs because American consumers have turned against high tuition sticker prices, especially since so few families pay the full price today.

When elite universities charge $65,000-$70,000 annually, the media focus on the extreme rather than on the more moderately-priced institutions that form the majority of America’s colleges and universities. But it is an open question whether the sticker prices over $40,000 resonate with the American public anymore.

It’s a mess with few supporters backing the old financial model upon which American higher education has historically depended to finance the enterprise.

America’s colleges and universities are certainly aware that they face a crisis of confidence, credibility and economics ahead of them. The question is how well and how quickly will they respond to this crisis.

Three things must occur:

The first is that higher education must recognize that its colleges and universities – whether public or private – face a situation that will not be ameliorated by outside factors like an improving economy or rising wages. The fact is that most American families believe that college is a right and not a privilege. They are less likely to devote the personal resources necessary to have skin in the game.

The second is that higher education must have an open, prioritized conversation about how to pay its bills. It is unlikely that a single partner such as the federal government will step in like a white knight on a singular mission to save higher education. A better policy is to determine the range and level of funding sources available to colleges across its historic funders. This includes both operational and capital support from all sources. The most important decision will be whether to keep the decentralized higher education system in place with reinvigorated and better-defined missions and purposes.

Finally, higher education must imagine the possible. It is likely that America’s colleges will see a wave of mergers, closures, and acquisitions over the next 50 years. If so, how will this be managed? For those institutions that have achieved sustainability, what are the terms that bring people, programs, facilities, and technology together to foster common agreement on what higher education contributes to America?

America’s colleges and universities have evolved successfully for nearly 400 years. They are nimble, creative and distinctive. Higher education must go forward with transparency, purpose and urgency. To begin, it must demonstrate its willingness to change and adapt.

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