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College is expensive. We all know that – and that is why parents come to financial advisors to talk about how they’ll pay for it. What you and your clients’ families may not be aware of is that the posted tuitions are rarely the price anyone pays. College tuition discounts vary widely and the methodology used to calculate tuitions is not disclosed by any college.
Making sense of college tuitions is almost impossible. It was designed that way by the consultancies who advise over 1,000 of the largest colleges in the U.S. on how to construct their tuition models in order to maximize revenues. These are multi-variant, dynamic revenue models which share many attributes with airline pricing models.
Wait a minute – are we talking about taxpayer-funded educational institutions?
Yes, and understanding the mechanics of the pricing systems of colleges can be a very high-value service for financial advisors.
Here’s a crucial point to understand when you are in the market for a college education – you won’t start with a base price and then add on options. With college tuition, everyone starts at full price – the sticker price – and then tries to figure out what aid, scholarships, grants and so forth might be available. You start high and then the onus is on you and the family to figure out what aid and discounts might be available to you to bring the price down. The smiling face in the ”financial aid” office may not do much more than hand you a stack of forms to fill out. As a reference point, the average net price tuition at public colleges is roughly 50% of the sticker price. The discounting is even greater at most private colleges.
What is the underlying discount methodology? Let’s work through the discount structure by way of example. Assume that we have an advisor who is working with the Jones family as they plan to send Billy to college. The Jones have about 10 schools they’re contemplating for Billy, one of them being University of California, Irvine (UCI). The sticker price for UCI (in state) students is $15,800. Know that, in principle, a rich student with poor grades who is accepted will pay close to $15,800. Conversely, a poor student with excellent grades will pay little or no tuition. Now, we’ll get our hands dirty and explain what happens for those who reside in between those two extremes.
The Department of Education provides some financial aid to most students who are planning to enroll in college. Financial aid comes in two forms, need and merit. Need-based aid is crucial in making college affordable to low-income students. Your clients however, will rarely qualify for this form of aid. Merit aid is just as it sounds – if you’ve made the grades, you’ll possibly get the aid. Inform your clients though, at top colleges, every kid has excellent grades. Who provides the aid? Need-based aid comes from federal, state and college grants. Merit aid is generally provided by the college and is typically referred to as ”institutional aid” as well as scholarships.
How does one apply for aid? Need-based aid is obtained by filling out the FAFSA (Free Application for Federal Student Aid), which is also a mandatory application for all colleges. The FAFSA leans heavily on families’ tax filings and be forewarned that the volume of financial, household and familial information they require is quite surprising. (Financial advisors generally charge $400 to $1,000 to complete and submit the FAFSA) The good news about the FAFSA is that when you submit it electronically (which is easy to do) every college that you consider applying to will have automatic access to your application.
Then you have scholarships and they are accessed by submitting the College Student Scholarship (CSS) profile. The likelihood of getting scholarship monies is over-rated. However, once you’ve filled out the FAFSA, it is worth repeating the abbreviated process of filling out the CSS application. Scholarships are typically awarded on a case-b-case basis by a specific college and are generally awarded for a single year.
Institutional aid and the negotiation process – When a school accepts a student, they’ll send an acceptance letter with an offer of aid. The aid will include federal and state aid (which will be the same, regardless of college), as well as the “institutional aid” which is a college-specific grant. Your client should be informed that they can negotiate the institutional aid that is offered. The institutional aid is coming out of the college’s budget; it can be significant, and it is almost always negotiable. The remaining balance when you deduct all aid from the sticker price is the expected family contribution (EFC). The EFC is a technical-sounding term for ”What we’re hoping to get you to pay.” Federal and state aid are a fixed amount and non-negotiable. The more institutional aid your client receives, the lower their EFC will be. Understanding college pricing models is crucial to lowering the clients’ EFC.
Let’s now get into the details of the variable pricing models used by colleges. Through the mathematical analysis of millions of recently admitted students, we have ascertained that there are two significant factors in determining which students are accepted, and what their EFC will be: 1- grade/test scores, 2- family finances. There is a matrix which is the inter-relationship between these factors, and it is oriented towards maximizing revenue for the college. To meet their financial, academic and diversity goals, most colleges endeavor to have a 10/80/10 distribution of students:
- 10% of the student body should be very high academic achievers and the college will give significant institutional aid to these students in order to attract them to their college. This pool gives the college academic credibility.
- 80% of the student body should be ”within range” academically, and come from an affluent family. Recall that institutional aid comes out of a college’s own budget and it wants to give up as little of that money as possible. It’s easy for an admissions rep to say to a wealthy family of a kid with middling grades, ”You are not unique relative to our applicant pool, and we reserve the majority of our aid for exceptional and needy students.” The salespersons in the admissions office are very well versed in this process and they will happily point to a thick pile of applications on their desk when mentioning, ”You are not that special. We’ll admit you, and as a good faith gesture, here’s a little bit of aid.”
- 10% of the student body is thought of as the ”vanity pool.” These are students who the school admits for the purpose of meeting diversity requirements – they are generally low income, minorities, and disadvantaged students. They will receive substantial institutional aid.
There are of course additional factors which can come into play, such as legacy points (parents, grandparents are alumni). However, colleges are businesses and the majority are under the most significant financial pressure in the history of higher ed, and they need to realize as much revenue as possible.
Some of the most important information you can impart upon a client family regarding the college-selection process is the effect of attempting to enroll their child in a ”reach school.” Many parents are fanatical about getting their kid into the most elite college possible. A reach school is a college in which the child does not qualify academically. They are basically out of the SAT range. Having a kid in an elite school sounds great at cocktail parties. However, chasing reach schools is expensive and dangerous:
- It’s expensive, simply because the school knows you want them and they don’t need you. These schools send out 1,500 acceptance letters when they only have 500 open seats. They want to have a few hundred students who they have great leverage over and will pay full price, or very close to full price.
- Students fail, a lot. The five-year graduation rate at four-year colleges is barely over 50%. Who fails? The students in the bottom quartile of the class.
The reach school is very profitable for colleges. It’s an expensive disaster for most families.
Financial positioning – This is the exercise of structuring and presenting the clients’ finances and assets in a manner that reduces their tuition liability. The family’s primary residence is exempt from their net-worth calculation. Retirement assets are also not counted in the calculation of EFC, but other assets: savings, 529 accounts, CDs, money market accounts, investment real estate, stocks, bonds, mutual funds, commodities, are all included in the EFC calculation. If your client wishes to engage in structuring their finances in a way that reduces their tuition, they should consult an expert regarding what is allowable in the current year, as well as a tax lawyer.
Other information that you may find helpful:
Elite private colleges – These are reach schools for literally 98% of students who are enrolling in college. Some of the elites that have significant endowments and will give full rides to exceptional students. When you’re client says their kid is a genius, star athlete, plays the cello and should be accepted by all of the Ivies, the elite colleges have an acceptance rate of less than 10%, and their kid’s application is typical of Ivy applicants.
Private colleges (2nd and 3rd tier/SAT scores of 1,200 to 1,400) – are struggling financially due to declining enrollments in recent years. Our data show that these colleges are discounting tuitions significantly in recent years to attract new students.
Negotiating with a college over institutional aid – here are a few suggestions:
- Have at least three schools that you are absolutely ok with attending.
- Let the admissions officer at each college know that you’re looking at other similar colleges. They know exactly who they compete with for students. This is a subtle way of serving notice.
- Ask the admissions officer what the lowest net price that a ”similarly situated” student (same grades, same family finances) is paying.
- When they’ve given you their best offer, ask for additional institutional aid.
- Know that in years 3, 4, 5 (and 6 if necessary) colleges dramatically reduce their aid. Try to lock aid in up front, though that is difficult.
Student loans – Use as a last resort. Many families make the mistake of borrowing to send their kid to an expensive private/out of state college. Employers view colleges in two categories when looking at resumes: the elites, and everything else. Save the money and send the kid to the local public college.
This article has been submitted by Educate To Career (ETC) co-founders, Paul Hill and Michael Havis. ETC is a nonprofit, specializing in providing college planning programs and data to over 1,000,000 families, financial advisors, and campus career centers each year. We are the leading vendor of actuarial analysis of college outcomes data to student lenders. Our charter is to help young people get an affordable education, leading to a real job, with no student debt.
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