Wednesday, January 7, 2009

Financial Aid / Shopping Around for the Best Deal

Financial aid is a big guessing game, the luck of the draw, one of the last great mysteries in life…You get the idea. With January as a big FAFSA month, I’ll take this time to explain why financial aid is so messy—why when a student asks how much college will cost them, it’s impossible to predict.

Universities have different sum totals of financial aid to award, based upon public financial aid dollars and the institution’s own allocation of resources to financial aid. In general, universities flush with resources shower financial aid grant dollars on admitted students while universities not so well-resourced offer admitted students much smaller packages weighted towards loans rather than grants.

In the last decade, elite higher education, buoyed by high investment returns and driven by competitive pressures to enroll high-achieving students, has pulled away from the rest of higher education in the quality of financial aid, with some schools like Harvard, Brown, UVa, and Penn offering free educations to low-income students. Kudos to these institutions!

In the world of non-elite higher education, many less well-endowed institutions have accelerated their use of merit-based scholarships to recruit students with high SAT scores, high grades, prized athletic talents, and sought-after diversity. In 1994, a survey by the National Association of College Admissions Counselors found that merit aid constituted 27% of all institutional aid funds, and need-based aid was 66%. In 2007, merit aid increased to 43% and need based aid shrank to 49%. With merit aid so sizable, “financial aid” is effectively a pricing strategy and enrollment management tool used to optimize the number of applications, matriculations, revenue, SAT score averages, and diversity.

What can students expect to get from the colleges to which they are admitted? It’s hard to tell, because it depends not only on their family finances and the cost of attendance but also their grades, test scores, extracurricular skills, and ultimately how attractive they are to the institutions to which they have applied. In other words, college is variably priced, and financial aid awards vary within many institutions for students of similar means.

In this environment of extreme differences in university financial aid resources and the acceleration of variable pricing, students benefit from applying to many institutions to see what aid award offers they get. Students need to shop around! The challenge is that seeking out a college education is a lot more time-consuming, stressful, and life-shaping than most other shopping exercises.

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