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‘Confusing and complicated’ college financial aid game may be changing

MIT (above) and Brown University are among the colleges being sued over the calculation of financial aid offers.Erin Clark/Globe Staff/file

A class action lawsuit filed this month against a consortium of 16 elite colleges has once again thrust the shadowy world of college financial aid into the spotlight.

The suit was filed on behalf of middle-class families, attorneys said, who claim the schools — including MIT, Dartmouth, Yale, and Brown — illegally conspired to keep aid offers low, in effect keeping the price of college high. While a court will ultimately decide whether the institutions violated the law, which the schools deny, the case raises broader questions about the way institutions decide whom to admit and how much scholarship money to award.

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The main problem with financial aid, experts said, is that students and their families are forced to make huge financial decisions about whether and where to apply to college with fairly limited information about how much they’ll have to pay. Colleges, meanwhile, gather increasingly detailed information about students’ families through sophisticated data analysis that allows them to make shrewd calculations about how little scholarship aid they can offer to entice a student.

At a time when students are taking on record amounts of debt, this forces those without unlimited resources to make really difficult decisions. It also means that some students don’t even bother applying to college.

“We have a system of pricing in higher education that is so confusing and complicated that it turns people off,” said Phillip Levine, a Wellesley College economics professor and expert in higher education finance.

And yet, changing demographics in the United States have put the number of college-age young people in decline, which has begun to create a shift in the college market, worrying institutions and giving savvy students and families a competitive edge for the first time in decades.

The lawsuit was filed in federal court in Chicago on behalf of five former undergraduates who attended some of the schools named in the suit. The complaint details how the group of colleges collaborate as part of an organization known as the 568 Presidents Group and develop one method they all use to evaluate how much students can pay, with the goal of giving students similar aid offers.

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The colleges are allowed to do so under federal antitrust laws because they are so-called need blind — they make admissions decisions without regard for a student’s ability to pay. But the suit argues that some of the schools have, in reality, found ways to determine how much a family can pay. For example, if they see that a student’s family members also attended the school or made a large donation, they can infer that the student comes from wealth and doesn’t require as much financial aid.

Institutions use sophisticated data analysis methods, known as enrollment management, to predict how much a student can pay in an effort to admit enough full-pay students to offset any scholarships. The plaintiffs say this group of elite schools agrees on a figure for each student, so they’re not competing with one another to offer that student the best price.

The suit focuses on just one corner of the convoluted financial aid landscape. Unlike the elite institutions the complaint targets, most colleges do not have hefty endowments, so they’re under even greater pressure to balance their desire to admit a diverse class with their need to collect a certain amount of tuition revenue from students.

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This increasing pressure has led virtually all schools to advertise a relatively high sticker price, which a small number of wealthy families pay, but then offer most students scholarships that are essentially just a discount. A recent survey of private colleges found that the average discount rate is 54 percent, meaning that many students pay less than half the sticker price. The survey found that 83 percent of all undergraduates received some form of scholarship from their school.

This convoluted system often discourages low-income and first-generation students from applying, Levine said, if they lack experience with the way the system works in the United States.

“The only number that you’re telling them is the number they’re not going to have to pay, and they don’t even know that,” Levine said.

Another issue complicating the financial aid process is the extreme complexity of the federal student financial aid form, also known as FAFSA. The form asks detailed questions about a family’s income and assets and is overwhelmingly complicated for many families, especially those for whom English is a second language. During the pandemic, with less access to high school college counselors, many students simply didn’t bother to fill out the form or apply to college at all.

Financial aid awards are often one of the last pieces of information schools provide to prospective students, forcing those who cannot afford to pay full tuition to wait until late in the spring to evaluate their offers, even if they applied early. And then, financial aid award letters can be hard to understand. Some letters include loans, others do not. Different types of loans have different payback rules. Some aid has academic requirements. There is also some government aid, like the federal Pell grant, that has income requirements.

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Colleges, on the other hand, have access to not only the detailed financial information that families provide on the FAFSA and other financial aid forms, but they increasingly employ sophisticated marketing agencies to attract students, as well as so-called enrollment management experts to help them determine how much aid to award.

These enrollment management firms employ data scientists to advise colleges, using data and algorithms, on how much aid they need to offer a certain type of student to convince them to enroll. Students of greater means often don’t need to be awarded as much to be enticed, whereas attracting low-income students requires a greater financial investment by the college.

The basic calculation is “how much financial aid do you need to offer to enroll the class that you want, but at the same time have enough tuition revenue to keep your operations going,” said Brett Schraeder, managing director for financial aid optimization at EAB, a national enrollment management firm.

Enrollment management consultants say they provide an important service: Helping schools figure out who’s willing to pay higher tuition that will subsidize lower income students.

Schraeder said these enrollment management strategies began to gain popularity after a previous antitrust lawsuit in the 1990s, when courts ruled that schools could not confer about their financial aid strategies. Instead, schools had to figure out how to compete for students without sharing any information. As computing and data analysis have become more sophisticated, the industry has grown.

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Shifting US demographic trends have put more pressure on colleges to do whatever it takes to attract as many high-paying, highly qualified students as they can to fund their operations. The number of young people is dropping, and is expected to drop even further, a trend that has created more competition among schools, especially non-elite schools. More than 1 million fewer students are enrolled in college now compared to before the pandemic.

As a result, more colleges have hired these sophisticated firms to help them target prospective applicants.

“It’s not enough anymore to just be a good small college ... in a nice town. You really have to figure out, ‘OK, who is our market, who are our students?’ ” Schraeder said.

Kevin Carey, vice president for education policy and knowledge management at New America, a Washington, D.C., think tank, said schools increasingly give aid to wealthier students because they have found that even a small “merit scholarship” is likely to entice someone to attend.

“Lower-income students can get squeezed by that,” he said.

In response to skyrocketing tuition costs and more awareness around the detriments of borrowing, however, families are beginning to recognize that they have more bargaining power over schools than in the past.

Many are demanding more information on what return they will get on any given degree, said Jon Carson, founder and CEO of College Guidance Network, a virtual college counseling service.

In the past, Carson said, any college degree at all was a pretty sure ticket to a middle-class life. Now, he said, some majors come with vastly higher earning potential than others, and families think about that.

“This isn’t about discovering yourself, you’re making an investment, and people have to be really clear what the return is,” he said. ‘’Consumers are now thinking of themselves as consumers because it’s such a big number, and that’s a new paradigm.’’


Laura Krantz can be reached at laura.krantz@globe.com. Follow her on Twitter @laurakrantz and on Instagram @laurakrantz.