Start a conversation about financial aid with almost any chief admission or financial aid officer, and you'll hear inspiring stories about heroic families and grateful students. Very quickly, however, these conversations turn to the gathering storm on the financial aid horizon. Limited government grant aid, exploding student loan burdens, dwindling institutional resources, increased price resistance. . . these are the swirling winds of consumer revolt. Will colleges face the truth in time to avert the consequences?

Financial aid was supposed to create access to higher education and afford some degree of choice for families who could not otherwise send their children to college. At the same time, as a partnership between families, government and colleges based on a universally accepted means test, this patchwork quilt of federal and state grants, subsidized loans, work-study and campus awards was supposed to provide the revenue necessary to support the educational enterprise. Now, increasingly, it does neither.

Family income is declining, driving up need for less affluent students and reducing the ability and willingness - of more affluent families to pay for college.

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Combined with federal actions since 1981 to limit grants, expand the definition of need and increase loan eligibility, college marketing, financial aid and pricing responses have created controlled chaos and eroded the credibility of the federal needs analysis and college pricing practices more generally.
The decline in American family income affects all income levels, even upper quintile families.

Because the capacity of states to provide resources for higher education is tied to personal income, states are unlikely to increase their commitments, according to Brian Zucker, president of Human Capital Research Corp. and principal researcher on several statewide family finance studies. The important thing to understand, says Zucker, is that the economic and policy environment facing higher education is structural, not the result of a self-correcting economic cycle. "In short," says Zucker, "no new money."

To some degree the credibility of the financial aid system has been under pressure for years. Any financial aid officer (and far too many neighbors) can cite examples of families manipulating the needs analysis, refinancing a house to hide equity or putting financial assets into cars or "untaxed" real assets. Earlier this year Connecticut College President Claire L. Gaudiani wrote a widely cited letter to The New York Times decrying the "parents, financial planners and even influential publications" who are not acting "ethically" in reporting income and assets for determination of family contribution and financial aid, diverting money "from the truly needy."

The market-oriented Forbes, challenging this view of financial aid as a beleaguered means-tested equity tool, published two articles ("Taxation Without Representation" January 17, 1994, and July 18, 1994) portraying the financial aid system and private college pricing structures differently. Writer Peter Brimelow views campus representatives as "miscalled 'financial aid officers' [who] are really just like Internal Revenue Service agents. Their job is to use high nominal fees and the complex regulations governing rebates - aid - to extract as much money as possible from parents." He quotes a Manhattan financial advisor who argues that the parents' job is to use the regulations to pay as little money as possible - within the letter of the law - making a distinction that is universally accepted in the tax field: avoidance (legal) and evasion (illegal). Avoidance, he makes clear, applies to saving for college.

Many observers have long noted a public perception that saving for college was penalized by the needs determination methodology. They fear a larger, more troubling trend: the failure of families to save for college at all.

" Financial aid policy was always based on the premise that paying for higher education was, first, a family responsibility," says David B. Laird Jr., president of the Minnesota Private College Council, which represents 16 liberal arts colleges. "We were shocked when our research showed that nearly 57 percent of Minnesota families with students enrolled in the state's four-year public and private colleges had never saved for college. If families don't see paying for college as a responsibility, then it's hard to see who will."

A comparable study of Florida families with dependent students in public and private two- and four-year colleges showed that more than two-thirds of these families had not saved for college.
Claire (Micki) Roemer is director of financial aid at Tarrant County Junior College in Ft. Worth, Texas. Tuition there is $560 a year. The former chair of the National Association of School Financial Aid Administrators (NASFAA) and mother of two college students, one of whom graduated from Harvard University last spring, sees a growing entitlement mentality among students and families that she is at a loss to explain. Noting that "there is no typical family anymore," she nonetheless observes that "there's no concept of putting aside. People expect something today; parents are less willing to sacrifice to send their children to school "

Referring to Congress' expansion of loan eligibility, Roemer, whose office calculates aid on total student budgets in the $5,000-$6,000 range and often satisfies need with Pell grants, says, "We've started to see a whole new population in the $60,000 - $80,000 income bracket coming in for un-subsidized loans this year. The combination of subsidies does change behavior, but there is no recognition of the day of reckoning for those who owe," she worries. To illustrate, she points to a student with $18,000 in student debt, $15,000 in credit card debt and a $22,000 a year job.

Both Roemer and Laird point to a troubling disparity in the level of effort poor and more wealthy families seem willing to make to send their children to school. The Minnesota family finance study found that students from families earning over $50,000 a year were three times more likely to attend a public or private four-year campus than students from families earning less than $30,000. "But, these low-income families make an extraordinary effort to pay for college," explains Laird. "They contribute up to five times more in family resources than expected under the [1991] federal financial aid guidelines, and borrow twice as much each year than their more affluent counterparts. Among families at her school, Roemer observes "poorer families are willing and do more for their children. [Financial aid] does work if you really want it to," she says.

Beloit College Vice President for Enrollment Services Al McIvor concurs. "Ask a low-income family what they think they can pay, they might say $3,000. Ask an upper-income family the same question, and you're liable to get the same answer."

Reauthorization of the Higher Education Act in 1992, for many observers, completed a reverse evolution of the needs analysis. "For us, federal methodology is no longer a definition of need, it's a distribution formula," says Tarrant Junior College's Roemer. Congress expanded once again the definition of need, creating need higher up the income scale.

As a result, more families now demonstrate more need. Declining to increase grant aid while expanding loan eligibility, Congress continued the shift of emphasis from grants to loans begun during the Reagan administration. As a result, available aid is spread more thinly across more and more students.

" In the first six months of this year, subsidized loan volume nationally expanded 44.5 percent compared to the same period last year," observes Zucker, who sees this as phenomenal but predictable. Perhaps not uncoincidentally, the Department of Education recently extended payback periods to up to 30 years for these loans, an action which possibly acknowledges that these students' future income may not accommodate a more traditional repayment schedule, given the expanded loan burden they will face.

Responding to these economic and policy pressures, competing for students and revenues, many colleges have contributed to a changing set of expectations about price and cost, further undermining the financial aid infrastructure. By repackaging aid in response to competing offers, and by providing no-need scholarship programs, sometimes without legitimate merit hurdles, colleges have sent the message that price is negotiable.

We have all heard the stories: A parent calls the dean of admission at a venerable Midwestern liberal arts college to say there is a $6,000 difference in financial aid offers between the three colleges his son is considering. "Why are you telling me?" the dean asks, knowing why. The father wonders how all of these colleges could claim to meet need and come up with such different aid packages. But what he wants is a better offer, and he gets it.

The end result, says Zucker, is that financial aid "has shifted from being an instrument of equity to a marketing tool."
All but the most selective private colleges have internalized these economic and policy realities, raising tuition well above the rate of inflation to meet both increased costs and cover corresponding jumps in institutional aid. This has loaded the funding for the need-driven discount afforded lower-income families onto tuition, particularly tuition paid by no-need families. The larger the discount, the lower the revenue. The lower the revenue, the less there is to sustain aid commitments and invest in the academic program.

The Forbes articles may be elaborate sophistry justifying a growing entitlement mentality, but they represent perceptions among upper- and middle-income families who are increasingly price sensitive. As the higher education economist, Morton 0. Shapiro, author of Keeping College Affordable, said in the Chronicle of Higher Education [April 13, 1994], private higher education has "hit a price wall" and is largely recycling the whole thing into financial aid" when they raise tuition.

Jim Mingle, head of the State Higher Education Executive Officers organization, has written that it is apparent from the debate on health care that "those who pay the cost eventually will seek to control the costs. Without internal cost control in higher education, we can expect both state and federal intervention, as well as consumer revolt."

Students with need at public universities are also hurt by these economic and policy circumstances, especially when state legislatures fail to protect them with increased aid. But, with only about half the students at many flagship state universities qualifying for aid and with much of that need funded by federal and state grants and loans, most of these schools need not worry about institutionally funded aid in the way private colleges must.

In fact, many public universities operate merit scholarship programs, hoping to attract a bigger share of the better students currently selecting private colleges, a move that increases the competitive pressures distorts the market and erodes price and equity credibility. A new wrinkle at the state level comes from Georgia where, courtesy of the Georgia state lottery, any Georgia student with a grade point average of 3.0 or more who comes from a family with an income under $100,000 receives free tuition at any public college or university in the state.

The big picture is not pretty. "The federal government is willing to recognize more need than states or institutions are willing to bankroll, families are unwilling or unable to prepare, and colleges continue to raise tuition faster than CPI while family income is dropping" summarizes Zucker.

" Ideally," says Minnesota's Laird, we should focus on goals such as access, choice and quality in federal and state policy development and recommit ourselves to need-based aid, but that's not going to happen anytime soon, especially at the federal level. I'm afraid we're in an institutional free-for-all, which will accelerate the economic divisions in our society. Success in providing academic quality and serving disadvantaged students will be a matter of institutional vision and management without near-term public incentives "

So, what strategies are colleges employing to meet these threats?

Solutions fall into three areas: state higher education finance policy reform; short-term institutional finance and marketing strategies; and longer term institutional management of costs, price, quality and academic investments.

While families are the predominant source of higher education funding, states have become the principle public underwriters over the last three decades. The public sector enrolls far and away the most students. In many states the state grant program provides more need-based grant aid per student than does the federal Pell program.

There is growing evidence, however, that the tremendous tuition subsidies - between 20 and 50 percent of per student instructional cost in most states - benefit mainly middle- and upper-income students who dominate public sector enrollment, effectively maintaining a barrier to entry for those from lower-income families.

Statewide research has documented these participation patterns in Minnesota and Florida, with Oregon about to launch survey research to determine participation patterns in that state. A more equitable policy, say many higher education economists, would be 'imply to shift more of the overall appropriation to need-based aid while reducing but not eliminating the instructional subsidy for students from more affluent families.

The barriers to this approach are more political than economic. Legislatures balk at cutting entitlement spending, and even many who favor this approach worry that legislators might see it as a way to reduce overall support for higher education. But, without state finance reform redirecting appropriations to more need-based student aid, colleges must shape their own financial aid future. At risk are need-blind admissions, commitments to meet need, and the ability to invest in academic programs.

Today most private colleges blend need-based aid programs with competitive merit-based programs as they pursue objectives for access, diversity, student capability and revenue through increasingly integrated finance and marketing strategies. The combination enables them to build diverse and capable classes while maximizing revenue and keeping middle- and upper-income families involved.

One result, according to Terry Lahti, dean of admissions at Kalamazoo College, is "the business, financial aid and admissions offices now work very closely together. Enrollment goals no longer come from 'on high' and there's a better understanding all around of what it takes to attract students, address need and educate students."

" The key," says Beloit's Al McIvor, "is balancing our resources." But as they seek to balance commitments to equity and academic quality, colleges cannot avoid facing tough financial aid policy choices. Given aid limits, colleges ultimately choose between "gapping" qualified students with need - in other words, admitting them but not meeting their need out of a moral conviction that they cannot deny the opportunity because of economic circumstances - or denying some students admission because the college cannot meet their full need and feels an equally strong moral commitment to meet fully the need of any student it admits.

Carleton, Smith and several other prominent colleges have made the decision to become "need-sensitive" at later phases of the admission process as aid commitments reach limits.

For most private colleges, and especially those operating below capacity enrollment, it is important to remember a point that former Kalamazoo College president and economist David Breneman makes in his book, Liberal Arts Colleges: Thriving, Surviving, or Endangered?

Those few colleges which could fill their classes with full-pay students and choose to diversify their students by granting need-based aid should see their aid budgets as expenditures revenue voluntarily foregone. For all the rest, financial aid is a discount of tuition, determined on the basis of need. Auditors may require that this discount be accounted for as an expenditure, but it is not, at least not in the sense that you could move $100,000 of it to the library budget and expect to generate the same revenue or balance the budget.

Preferential packaging, gapping and merit scholarship competitions are decades old and have helped colleges maintain some balance between equity and quality investments in the past. Financial aid leveraging analysis is a step up in sophistication and permits, based on past matriculation patterns, a prediction of the willingness-to-pay for a college's applicant pool stratified by need and academic profile. In this way, colleges hope to stretch financial aid budgets to increase enrollment, shape entering classes and maximize net revenue.

For example, a college which awards $5,000 merit scholarships may find that its matriculation rate for these able students would be the same if the award was $3,000, freeing dollars for students from other groups who would enroll at a higher rate with a minimal increase in grant aid.

" This problem is constantly in our mind," says Teresa Jackson, director of financial aid at Knox College. "How can we attract students when fewer and fewer can - or think they can - afford it." Her own matriculation analysis showed "what we had sensed about our financial aid applicants" - that students with lower need and greater academic ability were less likely to enroll.

Even with recent records in student matriculation, Knox recognized inflexibilities in its packaging philosophy and theorized that a small increase in the percentage of grants for low-need students and a small increase in the aid budget, might actually raise matriculation rates for these students.While follow-up analysis is incomplete, early results indicate that the new policy was successful in recruiting more lower-need students.

Just 20 miles down the road from Knox, Monmouth College has taken a different, but highly successful, price-oriented approach, which Admissions Dean Dick Valentine says has cut the time spent calculating financial aid in half and enabled his staff to "do its job better. We can spend our time talking about the college and its value," he says.

Based on analysis of the average net revenue it could expect to generate from its student population given family need and the college aid required to meet it, Monmouth has essentially equalized its price relative to Illinois' public sector for most families. The college grants $5,400 to all students except those with family incomes above $150,000, who pay the full comprehensive fee of $17,300.

Additionally, if the student (from Illinois or not) applies for aid before the deadline for the Illinois grant program, the college will guarantee $3,500 - the maximum Illinois award last year - for a total grant of $8,900. Those who qualify for more assistance receive traditional financial aid packages to make up the difference.

Cases in which the base award exceeds defined need are rare, according to financial aid director Brian Pomeroy, and these students simply don't qualify for additional assistance beyond unsubsidized loans. This net revenue model has increased enrollment about 30 percent, according to Vice President for Finance and Business Don Gladfelter. While its pricing model costs about the same as before, Gladfelter is pleased by the increased socioeconomic diversity of Monmouth's student body. "We don't worry about attracting 'full-pays' anymore. There aren't very many of them anyway," he asserts.

Monmouth also provides families with a four-year financial aid plan, an estimate of costs that guarantees the basic award will not drop below the initial package. "One of the things families comment on again and again is how much they appreciate the four year plan. They're afraid that [sometime after the freshman year] they'll have to pay the full price," according to Pomeroy.

In a conscious effort to manage price better while enhancing value, Drake University also has focused on the benefit of predictability. According to Admission Director Tom Willoughby, "Students and parents will not keep accepting increased costs without a measure of increased value. We're asking people to make a purchase without control of the final price of that purchase," he says. For entering freshmen, Drake guarantees that costs will rise no more than a fixed percentage in each of the next three years -3.5 percent for students entering this fall. While families appreciate the predictability, says Willoughby, so do administrators who have to predict aid commitments.

Larry Litten, director of research for the Consortium on Financing Higher Education (COFHE), cautions that colleges, however effective with aid and pricing, need to look further down the road. "It's always easier to try to compete on price. It's much harder to build the kind of quality and value for which people are willing to pay more." Student markets are much more differentiated than people think, according to Litten, and colleges should acquire a better understanding of the price/value perceptions and economic capability of their particular markets.

In the end, the best financial aid strategy for the future lies in creating additional value for students, not finding more sophisticated ways to package and allocate aid.

While aggressively managing costs and price, Drake just completed its most successful capital campaign, raising more than $130 million. Four new facilities grace the campus. This fall students and faculty will arrive on campus to new, top of the line Apple Macintosh computers in each dorm room and office. The entire campus is networked, and Willoughby says that's enhanced student-faculty communication.

As Litten suggests, building value that families are willing to pay for is the more difficult but potentially more rewarding. While many schools, principally research-based universities, have embarked upon Total Quality Management (TQM) initiatives, these have been predominately limited to administrative functions most susceptible to reengineering.

Stanford University and Oberlin College are exploring three-year baccalaureate degree programs, and several state coordinating, commissions have expressed interest. The main force behind this movement is cost, and for the moment, the thinking seems to focus on the possibility that an institution might deliver a traditional four-year degree in three years at some discount to the cost of four years.

But Litten has observed no effort to reengineer the liberal arts experience. "No one is looking at the production function on the academic side," he says, admitting that what happens at the level of the professor in the classroom at a liberal arts college is difficult to see as an information delivery problem subject to re-engineering. He worries that alternative organizations might deliver pieces of what these colleges now provide - "but it won't be a liberal arts education."

" Short term, there's not a lot of maneuvering room," Litten admits, "but colleges must become more sophisticated in marketing value. There's an appreciation that [liberal arts colleges] offer a unique opportunity, but they are not fully valued as a source of a degree with a significant quality difference." Lamenting how information-poor colleges are, Litten wonders at how little colleges do to document outcomes and research and describe qualitative differences between themselves and alternatives in their markets.

Beloit College, says Mclvor, has found in recent research that its longstanding strength in providing international experiences and language skills, "is beginning to show up as a key to students coming here," a development he attributes to the College's recent effort to document outcomes for students in terms of international careers.

Zucker observes that beyond courses added, dropped, completed, grades earned, and fees paid, there's not even very much in the student record to help drive the difficult finance decisions. If colleges knew how students use libraries, computer labs, co-curricular activities, recreational opportunities and other campus features and understood how these and advising and instruction affect outcomes, they would have a better sense of where to invest in order to enhance value, he reasons.

The current financial aid system was devised in the days of expanding incomes, growing government resources and a more certain faith in both the future and government's capacity to solve problems.

The times are not "a-changing," as Bob Dylan sang in those salad days - they have already changed. Colleges that recognize this new environment and respond bravely can prosper and exert the kind of moral leadership for society that colleges have traditionally provided in addressing economic challenges and inequities in our society.

Those colleges that do not face the truth will suffer the consequences.

As they reformulate price and position strategies, college admissions and financial aid officers are advised to keep these points in mind:

• Tuition and financial aid critically determine participation, but historically have been ignored as a market tool under institutional control.

• Effective use of pricing as a source of revenue maximization requires a systematic framework and a conscious policy of control.

• Financial aid is a key to diversity and equity.

• Financial aid is a key to optimizing enrollment and revenue.

• Financial aid constitutes a tradeoff between investment in academic product and addressing student need.

• Financial aid is inextricably linked to the behavior and circumstances of the full-pay market.

• Financial aid is not the sole resource for attaining enrollment, diversity or revenue objectives, but it is the more readily manageable resource.