Story taken from the New York Times, April 22, 1997

The New Economics of Higher Education


NEW ORLEANS -- "I loved Tulane," recalled Hillery Martin, a freshman from Los Angeles, about her search for just the right school, "But if I hadn't gotten the scholarship, I probably would have gone to the College of William and Mary."

Those words are music to the ears of Richard Whiteside, Tulane's dean of admissions, whose decision last year to offer smaller merit scholarships to larger numbers of applicants sharply increased both enrollment and tuition income without lowering the academic quality of entering freshmen.

"Just because this isn't a business, doesn't mean you shouldn't use good business principles" to meet the university's goals, he said.

Ms. Martin's choice also pleased Thomas Williams, a consultant to Tulane and president of the Denver-based National Center for Enrollment Management, a for-profit research firm.

The young woman's $10,000 scholarship -- in any other business it would be called a discount -- brought down the price of a year at Tulane to $18,700, roughly that of William and Mary, a competitor in the tier of schools just below the Ivies.

Yet even the discounted tuition she is paying more than covers Tulane's cost of educating an extra freshman. "You need to charge what your market will bear, while keeping a vigilant eye on affordability," said Williams, whose company is one of a burgeoning group advising colleges on how to get more bang from a scholarship buck.

Structuring scholarships in much the way airlines devise supersaver fares may seem out of place in the cloistered world of academia. But it is apparently the way of the future, as parents seek better value from their five- or six-figure investments in four-year colleges, and as all but the most selective colleges are forced to focus on the problem of attracting good students without losing revenue.

There is nothing wrong with this reshuffle of the financial deck, proponents say. On the contrary, they insist, everybody gains. "Efficiency and equity are not necessarily in conflict," said James Scannell of the consulting firm of Scannell & Kurz in Pittsford, N.Y.

Before the 1960s the modest store of scholarship aid available was mostly doled out according to merit. But as the idea that every high school graduate deserved a shot at college became a fixture of American life, the focus shifted to need. Washington got into the act, creating guidelines for aid and supplying a good chunk of the money through grants, loans and work-study programs.

These days the difference between the cost of college and what the typical student can afford to pay certainly has not diminished. Nor has the amount of need-based aid flowing to low- and middle-income students.

But in an era in which private education again seems a luxury, tuition discounting is increasingly seen by college administrators as a competitive tool for wooing high achievers -- or, in many cases, simply filling classrooms with high school graduates who pay more in tuition than they add to operating costs.

Tulane's scholarship policy illustrates the way the rudimentary science of financial-aid leverage -- what economists call price discrimination -- is altering college-enrollment practices. Tulane faces no immediate financial crisis. But by the early 1990s, administrators were uncomfortably aware that rapidly rising tuition costs were outstripping students' ability to pay.

The sticker price of a Tulane education rose 68 percent more than the cost of living from 1984 to 1994, while Americans' average income gained only 25 percent. To lure high-achieving students from low-income and even middle-class families, the university was forced to "spend" a disproportionate amount of its added revenue on scholarships.

Across the decade, its total financial-aid budget, excluding government sources, rose by 400 percent, to $44 million. And despite the increased aid, Tulane's competitive position apparently eroded: Rather than admit less qualified students, the school allowed its undergraduate population to fall from 5,342 in 1991, to 4,830 in 1995.

Williams, the consultant, recommended that the university use data from past years to analyze the admissions "yield" -- the percentage of accepted applicants who actually enrolled -- for each of Tulane's colleges -- liberal arts, architecture and engineering -- and for various categories like the students' academic standing in high school, the size of merit scholarships offered to them and their financial need.

The results from this simple exercise were striking. In 1995, Tulane's entire merit-based scholarship budget was spent on 111 full-tuition scholarships. And the yield from those scholarships was very high.

But relatively few applicants who just missed the cut for these generous merit grants -- and thus received no aid offer at all -- came to Tulane. So last year Dean Whiteside reduced the number of full-tuition scholarships from 111 to 50 and offered $10,000 discounts (a bit less than half of tuition) to 600 of the most qualified applicants from the pool of 6,400 high school seniors admitted.

More than half of the 600 enrolled. The loss of a handful of elite students who turned down the $10,000 offer but might have jumped at $20,000 was more than offset by the enrollment of larger numbers of still excellent freshmen with combined SAT scores above 1,350. And while merit-aid outlays went up, so did total tuition income because the class size swelled by 98 students.

That proved to be a worthwhile trade-off, since Tulane had classrooms and dorms to spare. "All we had to do was add a few class sections," Whiteside said.

Tulane's rejiggering of merit aid offended no one. The only losers, the 61 students who got $10,000 scholarships rather than a free ride, never knew who they were.

But more sophisticated forms of price discrimination are controversial. Many colleges are pumping up aid to students expressing interest in less sought-after departments and decreasing help for those fighting to get into popular ones.

Since Carnegie-Mellon University in Pittsburgh has few peers in the sciences, for example, it offers little merit-based aid to budding computer specialists. By contrast, high-achieving applicants in liberal arts are courted with hefty discounts.

Sandra Baum, an economist at Skidmore College in Saratoga Springs, N.Y., notes that some colleges are now routinely using merit aid to adjust their male-female mix. Many more are using merit aid to increase the enrollment of blacks and Hispanic people. Vanderbilt University in Nashville, for example, sets aside full-tuition scholarships for the cream of its minority applicants.

As colleges delve more deeply into the art of calculating just the right level of financial aid to woo students, they are discovering that certain variables that have nothing to do with need or academic ability can make a big difference.

The Wall Street Journal reported that Johns Hopkins University in Baltimore, for example, found that less money was needed to entice applicants who had visited the campus. While Johns Hopkins apparently never acted on the evidence, there are plenty of other benchmarks that could prove useful in formulating aid policies that achieve enrollment goals at minimal revenue loss.

An easy one is geography. In-state applicants are widely assumed to be less sensitive to price than out-of-state applicants. That creates an incentive to offer bigger discounts to out-of-staters -- particularly those with access to high quality, low-tuition public schools like the University of Michigan or the University of California at Berkeley.

"Such price discrimination is the next step," Williams suggested, "and it's almost inevitable."

But the aggressive use of price discrimination makes many educators uneasy. Few colleges, for example, have thus far followed Carnegie-Mellon's policy of encouraging applicants to shop for the best price. "If you received a financial-aid package from us that was not competitive with other offers, let us know," urged a letter from the admissions office to some applicants.

And while Dean Whiteside at Tulane plainly glories in the rough and tumble of competing with recruiters at other colleges -- "I want them to say the sucker down in New Orleans ate my lunch," he said enthusiastically -- he still worries that offering different aid packages to students of equal merit and need would undermine the egalitarian spirit of Tulane's campus.

The even thornier issue is whether the sophisticated use of financial leverage will reduce the amount of aid available to needy students.

Certainly the incentive is there. Even students with limited financial resources may be willing to scrimp and borrow to go to the school of their choice if the aid they are offered shrinks. Thus, figuring out students' threshold of pain allows colleges to squeeze a little extra money out of them.

If the incentive is there, so is the moral rationale. "From an economist's point of view," wrote James Day, the president of Hardwick-Day, a Minnesota consulting firm, price discrimination produces the most value for the most people. Thus "a market in which willingness to pay is the chief arbiter in enrollment decisions benefits society as the ultimate source of equity."

The unanswered question is whether the imperative of the market will increase or decrease access to expensive private colleges for low- and middle-income students.

Gordon Winston, an economist at Williams College in Williamstown., Mass., is pessimistic. While merit-aid programs at Tulane and many other schools appear for now to have created win-win opportunities, he argues that grinding competition for high-achieving students from affluent families will eventually come at the expense of the needy ones.

"The more of our general subsidy that is targeted to high-income students," he said, "the less there will be for the needy kids."

Copyright 1997 The New York Times Company