The end of financial aid leveraging?

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:

1.  a 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,
2.  a willingness to pay money (or to borrow money) to make up the difference between aid and cost of attendance, 
3. 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:

1. that students will come even if pricing is unclear,
2. that the particular model of financial aid leveraging is both financially and morally defensible,
3. that the model of leveraging maintains or improves the overall quality of students at the campus,
4. 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.

The most important fact about the future of higher education

Many things will be true about higher education; only some of those things will be important. If your school is concerned about the future of higher education, it must both figure out what makes a fact important (in my book important facts are those that, if acted upon, have the potential to change the whole institution), and which important facts your school wants to focus on.

The most important fact about the future of higher education is this: all students will be transfer students.  By this I mean two things: first, that an increasing proportion of students will approach an institution bringing transcripted credits with them, and second, that even more students will bring expertise with them that they have learned outside traditional institutions, but which must be transferred into their new campus if that campus is to be true to the student's learning and aspirations.

Here are several ways in which the fact that all students will be transfer students will transform higher education:

1. Traditional measures of success for access, retention, and graduation, will become obsolete. If most students bring credit with them, there is no such thing as a "freshman class," retention will not be controllable (since students will move easily among several institutions), and four-year graduation rates will mean very little, since few campuses will provide the entirety of a student's education.
2. The idea of a curriculum will be unstable. Curricula rely on students taking courses in sequence, or at least in an order required by the institution.  But transfer students will not join an institution with the same academic backgrounds, and so therefore won't want (or shouldn't want) to take courses in sequence.  Curricula must look like networks, not lines, and learning must include opportunities to make meaning of learning outside of a standardized sequence of courses.
3. The freshman year will be less important.  For the past two decades colleges and universities have focused on improving the first-year and placing distinctive programs in it.  But given the increasing number of students coming with credit and knowledge of varying sorts, the first year will be much less important than the last year, presumably the only time when most students at an institution will be able to have a common experience.
4. The most important skills for faculty will be aggregation, meaning-making, and certification, not teaching, learning, research, or any other currently popular aspects of pedagogy. It will fall to faculty to work with students to help them aggregate their prior learning from a variety of institutions and sources, make meaning out of it, add to that store of knowledge, and then certify that that knowledge adds up to something that can be carried along.
5. Colleges and universities will specialize more than ever before. If students are transferring knowledge and credits from many sources, only those institutions with identifiable specialties will be able to stand out among standardized options.
6. The most important alliances between institutions will be among unlike, not like, institutions. Currently nearly every alliance--athletic conferences, consortia, lobbying groups, faculty development networks, etc.--are among similar institutions.  Westminster is part of the New American Colleges and Universities, a consortium of institutions of similar size and programming.  The University of Utah has just joined the Pac-12 to be with schools more like it. But in a transfer world, schools will want to ally themselves with a network of differing institutions in order to maximize learning for (and revenue from) students.  We will see more formal alliances between community colleges and liberal arts colleges, research universities and teaching institutions, so that within a network of schools a student can get all the learning s/he desires, and individual campuses can contribute specific things of value to the learning of particular students.

What auto loans can teach us about student loans

If you were a recent high school graduate, worked hard, got decent grades, and wanted to borrow $20,000, you could spend it on one of two things: a new car or a college education.  One of those choices is a much better investment than the other.  But while it is almost universally understood that a college education is more valuable than a new car, it is also the case that the means of getting that education--a student loan--is widely feared while the means of getting the car--an auto loan--carries no such stigma.

There are big cultural reasons why this is the case: the contradictory fears that a college education is essential for success in life and inadequate to ensure that success, for example, or the nonsensical political debates about  student loan interest rates.

But I am more interested in the practical reasons that auto loans are accepted and student loans feared, because colleges and universities can do something about those practical considerations.  Here are five characteristics of auto lending that might be suggestive for student lenders. The characteristics share one factor that ought to be on the mind of people working to fix student loans: auto loans give people power to act in ways they see fit.  Student loans, at key points in the college process, make it more difficult, not less, to act.

1. Markets in interest rates matter--I can borrow money to buy a new car at 2.94% from my local credit union.  Occasionally, manufacturers offer 0% interest.  If I had horrible credit, but was willing to follow a strict repayment plan I could still get a loan, albeit at a much higher interest rate.  In short, there is a market for auto loans dedicated to making it possible for all sorts of people to buy all sorts of cars.  There is no meaningful market for student loans--regardless of your background, career goals, or ability to pay, you pay rates set by a single lender, the federal government, and take out loans in amounts dictated by the federal government. (And because there is no real market for loans, the few private lenders in the business can set their rates even higher than the federal rates.) Markets, when they work correctly, empower people to make informed decisions.  The process of getting a student loan is disempowering--all the key factors are out of the buyer's hands--the rate, the amount borrowed, the source of the loan, its term of repayment.
2. The size of the loan and the desirability of the purchase coincide--A new car is most desirable when it is new, and so its worth aligns with the amount owed.  As the car ages and its value declines, so does the principal.  As with cars, a college education is most desirable when it is new, before the hard work, the disappointment, and the frustration of choosing a major, writing a thesis, and facing up to the hard factors of life weigh in.  But unlike an auto loan, a student loan's principal is highest when the thing purchased--a college education--is at its end--the moment when satisfaction is often the lowest.
3. It is the monthly payment that matters--When you take out an auto loan, the focus of the discussion is on the monthly payment.  This focus, of course, obscures the total cost of the loan.  But it also helps people budget, since they know that each month for the coming five years they have to pay that amount.  In student loans, the monthly payment is a moving target until after graduation.  That fact makes budgeting difficult and forces soon-to-be-graduates to make decisions about their futures in a context of uncertainty.
4. There is a secondary market for the loan and for the purchase--If you borrow to buy a car, and then decide that the car isn't for you, you can sell it. Selling the car allows you to either invest in another car or pay off your loan early.  Or, if you keep the car, other people can use it--brothers, sisters, friends.  But there are no secondary markets for college educations or student loans.  The loan you take out is yours.  You cannot share its amount with a family member.  Nor can a friend take classes paid for by your loan. So the social benefit of a student loan and a college education are blunted by the way the loan is constructed.
5. An auto loan buys a car; a student loan does not buy an education--You buy a car because you need a car.  The thing purchased is directly tied to the money borrowed.  But a student loan really buys time in the classroom, not learning or an education. There are no guarantees; you cannot return the education if it isn't working, or get it repaired under warranty. For this reason, if time in college does not lead to learning, the price of the loan seems out of alignment with the value of the thing purchased.

It is my sense, then, that if the government is going to reform student lending, or if student activists are going to take up the issue, that they look to the auto business, where loans align with desires, serve social purposes, come with clear information, and provide freedom to act.

What does growing economic inequality mean for enrollment management?

The Occupy movement has coaxed economic inequality from a quiet, hidden corner of American civic discussion to the center.  By all measures, it is growing in the United States.  And it has sharpened the discussion about access, tuition rates, and the value of higher education.

The big questions about higher education are important ones.  In this post, I want to focus on something narrower, though--the impact of growing economic disparity on enrollment management.  This is a topic about which there has been little discussion, and about which there should be serious concern.  Here is why:

Growing economic inequality means three things:

1.  Children from families at the top of the economic heap will have ever greater educational opportunities because socio-economic status correlates with academic performance.  And in enrollment management, strong academic performance is linked directly to high discount rates, as schools compete for top students.
2. Children from families at the bottom of the economic heap, a growing proportion of American society, will require ever more need-based aid in order to go to college.  And in enrollment management, high need correlates to high discount rates, as schools try to make it possible for those students to attend college.
3. Therefore, enrollment managers will see increasing demand for both merit and need-based aid, and hence growing pressure on the discount rate from both ends of the spectrum.

The key question for enrollment managers, then, is how to face this dual challenge while bringing in enough revenue to meet the institution's need.  I don't know the answer, but I do suspect one thing--that schools who do it successfully will focus on narrowing the economic band from which they recruit students, because they can no longer count on one end subsidizing the other.