The Economics of a College's Admission Process

If your child is a senior in high school and is evaluating college options, he or she is most likely consumed with the decision about where to spend the next four years. No doubt, how to pay for college is more of a factor in the decision this year than it might have been in years past. Whether or not you qualify for need-based financial aid, your child may still have been fortunate enough to receive a merit-aid scholarship from some of the colleges offering admission. Why do schools do this for students who do not demonstrate need? You may be surprised to learn that colleges which rely on tuition to cover most of their expenses are more likely to offer merit aid, even during these turbulent economic times. Unless they fill every seat in the class, colleges may find themselves short of precious tuition dollars needed to operate. These are the funds necessary to pay everything from faculty salaries to the utility bills. Better to entice a student to attend by offering a nice discount to tuition than to fall short in filling the available spots, which may in fact mean resorting to faculty layoffs and other cost reduction measures.

The April 6 issue of Time Magazine had an interesting article: Sticker Shock: Inside the College Financial Aid Game by Laura Fitzpatrick, a look at the financial aid and admission process at Skidmore College this year. This article provides some interesting insights into the workings of a financial aid office at a college that relies 80% on tuition for its funding. According to one school official, not meeting their enrollment numbers by just a single student can mean a $25,000 to $30,000 gap in the operating budget. Skidmore, like many other colleges, actually increased its financial-aid budget 8% this year (primarily need-based) by reducing costs elsewhere including travel, faculty raises, and by placing renovation plans on hold.

So how does all of this affect a college’s admission practices and is it true that no colleges are truly need-blind (meaning that financial need does not factor into the admission decision)? There is no doubt that college admission in this economy definitely favors the student who can pay the full fare. While some schools still profess to be need-blind, others admit publicly that they are “need-aware” or “need-sensitive.” The most desirable students will make the cut, regardless of their financial situation. However, on the margin, the students who can pay will edge out those who can’t. By the way, one should not assume that a college which professes to be need-blind or need-aware will fully meet a student's demonstrated financial need. More and more colleges are following a practice known as "gapping," meaning that they accept a student, offer an aid package, but one that falls short of paying the full cost of attendance (a subject for another posting).

Even for families that don't qualify for aid, many are finding it very difficult to justify the private school sticker price these days. A recent U.S. News & World Report survey (published April 8, 2009) found that 70% of prospective college students will alter their college plans, seeking less costly options than they might have considered in prior years. Though college costs have been rising faster than the rate of inflation for many years, the time has come when families are recognizing the need to think more strategically about college and cost.