Financial Aid and a Growth Mindset

It’s about the revenue, stupid!

A play on words from the 1992 presidential race still seems apropos. Boards, heads, and CFOs care deeply about revenue, of course. But they often forget that revenue is derived from all enrolled students, not just “full pay” students (who are almost never full pay, since the dominant independent school model does not set tuition at the true cost of attendance).

Being fiscally responsible is not simply a matter of holding the line on budget items. Yes, school leaders need to watch expenses, especially in an era in which tuition increases have outpaced income growth for most American families. But it’s a mistake for school leaders to get overly fixated on expenses alone and miss the opportunity for positive growth — especially through wise, flexible, and strategic use of financial aid.

Financial aid comes in many forms these days — tuition assistance, scholarships, merit aid, discounting, preferential packaging, need-blind admission, student loans, net-tuition revenue, work-study programs, tuition remission, and, the newest iteration, the “sliding scale” (which indexes tuition to family income). They all have their value and purpose and can be used in service of both the school’s mission — who gains access and why — and the budget. But I’d like to focus on two key, but often derided or overlooked, elements of financial aid: net-tuition revenue and merit scholarships.

The net-tuition revenue model, in essence, focuses on both building revenue and providing access for students whose presence improve a school in multiple ways. Within the net-tuition revenue model, merit scholarships offer opportunities to attract students for whom the school would otherwise seem out of reach due to tuition and to the fact that the family’s income is either just high enough to disqualify the student from traditional financial aid or that yields an estimated family contribution that is too high for the family to contemplate.

While both net-tuition revenue and merit scholarships come with their pitfalls, in my experience they can be of great value to a school when used well — helping to ensure that a school enrolls a broad range of students, stays on mission, and maintains its long-term financial health.

A Tale of Two Schools

The story of two independent schools illustrates the point.

In 2008, the enrollment in two schools, along with the economy, was in deep decline. Both began the recession with enrollments hovering near 250 students, which was well below capacity. In response, one school took a growth approach and used net-tuition revenue (including an element of merit) and the other took a fixed approach, following a traditional financial-aid budget model.

School one increased financial aid by nearly 100 percent and watched enrollment grow by more than 45 percent to 360 as the endowment expanded fivefold to just under $15 million and budget revenue jumped by some 60 percent — all in the course of seven years. At the same time that the finances improved with net-tuition revenue, the school expanded its AP courses and other academic offerings, added additional arts programs, and engaged in a campus-wide improvement plan. The school also improved its athletic teams, earning more championships than in years past.

School two stuck to a fixed financial-aid budget. As a result, during the same period, enrollment dropped to 240, faculty numbers were reduced, and the endowment shrunk — all in an effort to “reduce expenses,” with no regard for the fact that revenue also declined precipitously.

The first school added dormitory rooms and courses to accommodate the surge in enrollment, which also meant some expenses increased. However, the institutional changes those expenses funded, coupled with growth in revenue, earned the school accolades among student and parent bodies.

The second school had vast excess capacity with many fixed expenses that could not be covered by the shrinking tuition revenue. Morale slipped. Parents worried.

Both cases serve as examples of hard choices the schools had to make, choices that led to some intended and some unintended consequences. School one was surprised by the rapid growth and had to adjust with nimble acumen, while school two didn’t really know how to climb out of the deepening hole it had dug for itself as revenue shrunk.

Net-Tuition Revenue

I once heard a director of admissions label net-tuition revenue as “unethical.” This is both a harsh and wholly incorrect assessment. Such misunderstanding and demonization of net-tuition revenue occur often, especially among school leaders who hold a narrow view about what financial aid is and is not. If used improperly, of course, net-tuition revenue can be unethical — that is, at odds with the general principles and purposes of need-based support. But used properly and intelligently, net-tuition revenue is a valuable form of need-based financial aid and a tool that enables broad access and affordability.

Let me explain. Inevitably, at the end of every admission cycle, after all the budgeted financial aid is awarded and students are enrolled, there is a group of students who sit in a wait pool — usually for no other reason than funding. These are students that most of the admissions committee want to enroll. Some of them are high need, while others are majority-pay students. In many cases around the country and abroad, there are desks and beds that, using the old model of strictly budgeted financial aid, go empty, even as the faculty and staff remain at fixed budgeted levels. With this mindset, finance committees, heads, and business managers often begin freezing various department budgets, slowing spending, and even requiring across-the-board cuts.

Schools with a growth mindset, however, look at those empty desks and seats, do some simple arithmetic, review various mission-based needs, and then begin pulling files from the wait pool drawer to ensure stable enrollment and additional revenue.

As files are reviewed, there are several ways for an admissions committee to approach them. For some schools, the need for revenue is the driving force. For other schools, a “game changing” student — those wunderkinds who might attract others to the school — becomes the driving force. In either case, each student’s financial need and the incremental costs of educating that child must be determined. Once that is done, the school should determine what revenue number is essential to enable the school to enroll each student. One effective way to enroll students in this model is to look at both access and affordability.

Using the net-tuition model, for instance, it may be possible to enroll both of these hypothetical students. Say your school is a day school with a tuition of $25,000. You offer the game-changer with high financial need $22,000 in financial aid, with the effective family contribution being $3,000. For the other, a very capable student with less financial need, you offer $8,000 in financial aid, with the effective family contribution being $17,000.

The return on investment yields two students, both mission appropriate, both good additions to the school, both with demonstrated need, and both yielding revenue to the bottom line — the equivalent of 80 percent of one full-pay student. The process was neither negotiated nor bartered and, therefore, neither unethical nor an expense.

In effect, net-tuition revenue took advantage of excess capacity in year one and, in subsequent years, increased revenue while not actually increasing expenses. You’ve laid the groundwork for stronger retention, improved revenue, and a critical mass of mission-appropriate students.

Net-Tuition Revenue Pitfalls

There are potential pitfalls to net-tuition revenue, of course, and financial-aid administrators must be in alignment with their heads of school, business managers, and finance committees on the topic.

As most of us know, Sweet Briar College is an example of tuition discounting going awry. The college’s discount rate increased as net revenue decreased. Net-tuition revenue must be about growth — growth in admission applications and growth in revenue. If the discount rate and revenue return on financial aid awarded do not align, then by all means step back and take stock before proceeding to ensure responsible use of net-tuition revenue.

Balancing access and affordability is something that takes direct and constant oversight and attention to detail. Enrolling so many students that you erode all excess capacity means there is no space to offer a full-pay, mission-appropriate student when one appears at the last moment — the “empty first-class seat model” that airlines use, holding that lone first-class seat until the last possible moment, hoping someone will buy it.

Schools must also review net-tuition revenue across divisions, consider the long-term implications of its use, and make careful decisions so that those enrolling will add value to the school’s program and attract future enrollment prospects. It is important, too, that schools do not award so much aid in earlier grades that there is little to no room for additional financial-aid recipients in later grades.

Merit Scholarships

Most important, we should recognize that, on some level, there has always been an element of merit in the financial-aid process. Except for the few schools that are 100 percent need-blind, where there is never any consideration of aid when accepting and enrolling students, merit exists when we must ask ourselves of a group of deserving and qualified applicants: Who will get funded for matriculation?

Colleges initially used merit scholarships to extend “preferential packages” to students they desired and who would improve the colleges’ profiles and attract more students. This packaging program grew to include merit awards as enticements — as a yield tool — attached to need-based awards or even to full-pay offers of admission to valedictorians, those with high test scores, and even those who simply submitted applications on time. Eventually, the merit model evolved into a marketing tool, not just a yield tool, with its use designed to attract students into the applicant pool. This shift was monumental for some colleges. Applications rose dramatically and, as a result, pulled applicants into the pool who might not otherwise have considered the college.

There remain some schools that say, “The ‘merit’ is getting in.” Sure, this makes sense at those schools that, regardless of an aid program, have many more qualified applications than spaces available. But what if the school wants to shift the profile of the student body or reduce excess capacity, or both? In this case, it makes sense to consider merit. Set up a merit-aid program that is designed to bring the desired students into the application process. Bring students and families to campus for merit scholar days to show off the campus, people, and programs. Provide additional opportunities for the school to connect with students who qualify for need-based aid and who seek access to all that the school offers. Be sure that the admissions team reaches out to students for whom tuition is not affordable but for whom no need is demonstrated, and entice them with merit funds that reduce tuition to a more reasonable range. These students still have to earn the funding — as opposed to the negotiated tuition that some worry about under the net-tuition revenue model.

At one school, merit funds were approved by the board and initially used strictly as yield dollars. Yield did improve, but the overall applicant pool did not improve and the acceptance rate remained as high as 73 percent. In the course of three years, as the program shifted to a marketing-based approach using merit scholarships, the number of applications increased dramatically. The program also had numerous “runner up” awards that were used for those at the very top of the statistical ladder. In those three years, the acceptance rate dropped to 38 percent and the SSAT percentile rose from the 55th percentile to the 75th percentile. The ninth-grade enrollment burgeoned from the mid-50s to more than 90 with an extensive wait pool, creating a critical mass of exceptional students, and establishing a demand curve that more than accounted for use of both merit and limited use of net-tuition revenue for some excess capacity in the day market.

Hands down, that use of merit aid was a game changer for the school and had extensive positive ramifications as the school entered a critical capital campaign, switched athletic leagues, and shifted its posture to a “first choice” institution.

A specific student at this school comes to mind. The student hailed from overseas and the director of admissions predicted that the student would go on to attend an Ivy League school (which was a goal of the school’s demographic shift). The committee not only accepted the student, but also fully funded the student. Sure enough, that student knocked the doors off the school and went on to join the ranks of the Ivy League — and now even sits on the school’s board of trustees.

Such students are the direct result of the investment through merit-based financial aid.

Merit scholarships should be transparent in the marketplace with any and all strings attached outlined and explained clearly. Because this is merit funding, it is perfectly acceptable to maintain different standards than for other forms of financial aid. On the other hand, do not disguise merit scholarship as need-based scholarship — if a school feels that a student is meritorious, then make that clear in the award letter.

Schools that have used both the net-tuition revenue and merit scholarship models abound with stories of success and some failures. Some schools have used net-tuition revenue only to find that 60 percent of their students are on financial aid after several years. But I would argue that, in these cases, the unintended result has little to do with net-tuition revenue and much to do with a program that doesn’t resonate in the marketplace, or it’s the result of the outright failure of communicating the value added of attending said school.

Regardless of whether your school has a significant endowment, excess capacity, highly selective admissions, or the need to improve revenue, the use of net-tuition revenue and merit scholarships makes good sense. The well-endowed school might have a need to bolster the school profile or have a segment that data show is sagging, thus needing a boost using either model. Conceivably the school with highly selective admissions has a few partial-pay students in the wait pool who are academic game-changers and, knowing the revenue goal has been met for the year, uses net-tuition to ensure that superb students aren’t left on the sidelines.

There are numerous schools across the nation that are experiencing soft markets as a result of tuition levels, demographics, school choice, school reform, and home schooling. Net-tuition revenue and merit recognize the fact that there are exceptional students seeking access to our schools and families yearning for affordability — even some of those families the government labels “upper income” and financial-aid evaluations deem capable of paying full tuition. As schools seek to secure their market positions, solidify their foundation for sustainability, and live out their missions, the use of net-tuition revenue and merit scholarships are two key components that can lead to favorable outcomes for our schools and students.