New Data Analysis Shows How Financial Aid Leveraging is Harming Low-Income Students at Public Universities

Public universities used to be a bargain. In most regions of the country, states heavily subsidized these institutions to keep the cost of attending low for their citizens. As a result, public universities were able to provide generations of low-income and working-class students with a gateway to the middle class.

However, over the past several decades, state disinvestment and institutional status seeking have worked hand in hand to encourage public universities to adopt the enrollment management tactics of their private college counterparts. With the help of expensive enrollment management consultants, many selective public universities have hiked up their prices and provided tuition discounts and so-called merit scholarships to lure affluent students with good grades and standardized test scores to their campuses to increase their revenue and climb up the rankings.

How has the shift to a high tuition, high discount approach affected the actual prices that students and their families pay at public universities? According to a recent analysis that Wellesley College economist Phillip Levine conducted, the prices that in-state public university students now pay, after factoring in grants and scholarships, are the equivalent of what they would have paid if they had attended private colleges “in the mid-1990s.” While public universities remain less expensive than private institutions, they have become “increasingly more expensive over time at all levels of the income distribution,” he writes

But while Levine found that the price of attending public universities has risen for students of all incomes, wealthy students have benefited substantially from discounting, while low-income students are being left with large and widening funding gaps. “College is indeed expensive for higher-income students, but the affordability problem is much greater—and more consequential—for lower- and middle-income students,” Levine writes. “If they can’t afford it, they can’t go.”

Levine’s paper, “Ignore the Sticker Price: How Have College Prices Really Changed?” focuses on how the average net prices that students and their parents pay—the amount owed after all grant and scholarship aid is deducted from the list price— have changed at selective public and private colleges and universities over the past three decades. For the paper, he analyzed data from the National Postsecondary Aid Study (NPSAS), a nationally-representative survey of undergraduate students that is conducted every four years. He focused on surveys starting in 1995-1996 and ending in 2019-2020, the latest available.

Levine found that with the spread of discounting at both public and private colleges and universities, very few students pay the full price anymore. In the mid-1990s, nearly one-third (29 percent) of private college students paid the sticker price. Fewer than one in five (16 percent) did so in 2019-2020. The decrease was even more dramatic at public universities, which began to embrace enrollment management and tuition discounting about a decade or two after most private colleges did. In 1995-1996, more than half (53 percent) of in-state public university students paid full price. By 2019-2020, that share dropped to just about a quarter (26 percent).

Unsurprisingly, the primary beneficiaries of discounting policies, which enrollment management firms devise for colleges, have been wealthy students. Since the mid-1990s, the share of affluent students paying the full sticker price has plummeted at both public and private selective colleges:

• At private institutions, the share of high-income students paying full freight fell from nearly two-thirds (64 percent) in 1995-1996 to a little more than a quarter (28 percent) in 2019-2020.
• At public universities, the share of affluent in-state students paying the full price decreased from more than three quarters (79 percent) to less than half (47 percent) over that time period.

To be clear, high-income students are still paying the highest prices, despite the discounts. Under the practice of financial aid leveraging, enrollment managers determine the precise price points needed to enroll different groups of students, without spending a dollar more than is necessary. Colleges know that for the wealthiest students, the size of the discount may not be as important as the bragging rights it gives them. Students and their families love being offered “scholarships” worth $5,000 to $10,000 because they see the money as a reward for their hard work, when schools actually award these discounts to improve their bottom line. Bringing in additional affluent students means colleges will have more students who pay close to full freight. And the colleges are hoping these students and their parents will become generous donors as well.

Low- and lower-middle-income students are bearing the brunt of these policies.

Back in the mid-1990s, many public universities kept their prices low enough that they did not need to give out much financial aid. Those colleges that did give out aid primarily used it to meet the financial need of their students. Now that many selective public universities engage in financial aid leveraging, these institutions are leaving financially needy students and their families with growing funding gaps.

Levine’s analysis shows how wide these gaps have grown. For instance, he found that at public universities, the average net price that in-state students with family incomes under $50,000 paid in 2019-2020 was a whopping $18,000. That amount has been rising steadily since 1995-1996, when it was $12,500, after adjusting for inflation.

Private colleges began adopting enrollment management policies and practices in the 1980s. As a result, many of these institutions were already leaving low-income students with large funding gaps in the mid-1990s.

In 1995-1996, students with family incomes under $50,000 paid an average net price of $20,000 in inflation-adjusted dollars to attend a selective private college. That amount rose to $25,000 in 2007-2008 and has remained at that level ever since. “One should not interpret this finding as indicating private colleges are becoming affordable for low- and middle-income students,” Levine writes. “Students with incomes under $50,000 are still being asked to pay around $25,000 to attend a typical private institution.”

How exactly are cash-strapped families supposed to come up with tens of thousands of dollars each year to send their children to selective four-year colleges? Too often, these institutions are directing these families to take out large Parent PLUS Loans, a federal program created in 1980 to help middle- and upper-middle-income students afford expensive colleges by allowing them to borrow up to the cost of attendance. For low-income families with few assets, borrowing PLUS Loans is a very risky proposition. Like federal student loans, Parent PLUS debt generally cannot be discharged in bankruptcy, and the loans are subject to the government’s extraordinary debt collection powers, including wage garnishment and partial offsets of defaulted borrowers’ Social Security benefits.

As I wrote in my book, Lifting the Veil on Enrollment Management, it is bad enough that private colleges engage in aid leveraging practices that put low-income families’ financial well-being in jeopardy. What makes this a true crisis is that public universities, which educate about 70 percent of undergraduates at four-year colleges, have gotten into the act as well.

Public universities, which were created to serve “the industrial classes,” are pricing out many of the students they were meant to serve. Low- and lower-middle-income families whose children do enroll are finding they have little choice but take on hefty amounts of debt that they may not be able to repay. The system, in other words, is unsustainable. It is time that policy makers take notice.