America's tuition pricing mess

Meet the real gatekeepers of higher education, an unseen army of data-crunching salesmen who dazzle college administrators and perpetuate the arms race that sends tuition prices ever higher

Published: Aug 26, 2014
America's tuition pricing mess
Image: Ryan Donnell for Forbes
Noel-Levitz Chief Executive Kevin Crockett runs the most important consultancy you’ve never heard of

Despite the windowless, bunker-like atmosphere inside the Erie conference room of the Sheraton in downtown Chicago, Galen Graber has to be impressed by his audience: A swath of the 1,500 top admissions and financial aid officials from 635 different schools who have gathered to set policies that determine which kids get into which college and how much money they’ll receive.

Cutting to the chase, Graber, a consultant, launches by taking a poll: “How many of you would say that the primary motivation for offering students merit scholarships is to reward academic achievement?”

Not a single person raises his or her hand.

That response goes a long way to explain college tuition rates that have risen 12 percent in the last decade while median household income has declined 6 percent over the same period. And why student debt levels have hit $1.2 trillion, a burden that surpasses even US household credit card debt.

Elite universities like Harvard, Stanford and others on the top of the Forbes list exist in their own orbit—they admit students without factoring in need, their multibillion-dollar endowments providing generous grants for the middle-class and poor.

Then there’s the rest of American higher education: The 95 percent of schools that have puny endowments and thus almost complete dependence on tuition, admitting virtually any high school senior able to fill out an application. It’s not a stable model. So, those not raising their hands at Graber’s seminar do so knowing that one of their core missions is to ensure that revenue—aka tuition—keeps flowing and growing, ever higher. Especially when so few constituencies—Sallie Mae and other guaranteed lenders, the GI Bill and other federal programmes, parents—pay attention to what’s driving the price that 22 million American college students pay.

As a result, the tuition pricing at America’s universities has evolved into something akin to a discount mattress retailer, though Graber’s employer, a consultancy named Noel-Levitz, has come up with a more august name for it: “Financial aid leveraging”. Noel-Levitz might be the most influential force in higher education pricing that you’ve never heard of, empowering what’s become a three-stage, market-distorting game for college administrators. First, conjure as high a sticker price as possible for tuition. Second, schools plow a lot of that extra money into student amenities, including country-club perks that outwardly justify it—and help with college rankings that reward such largesse. Finally, use your financial aid pile not necessarily to help needier students but rather to offer discounts to lure richer kids who might pay the rest of that inflated tuition price in full. The average yearly cost for a four-year, private, not-for-profit college is now $41,000— compared with $33,000 a decade ago—but the average discount rate for incoming freshman is 46 percent.

Poorer kids, meanwhile, are finding a growing chasm between Pell Grants and other aid and the bloated tuition prices. Their options to fill in the gap? Years of debt burden, courtesy of giant government-backed loans. Or they can choose not to matriculate.

“We have $2.4 billion in need that we are not filling, and there’s $3.3 billion we’re spending for students who could afford to attend college,” says Tori Haring-Smith, president of Washington & Jefferson College in western Pennsylvania. “That statistic should make us all stand up, take notice and be ashamed.”

Watching Galen Graber run his seminar, it doesn’t appear he’s ashamed at all. And it’s not clear he should be. Noel-Levitz is simply doing what consultants do: Helping their clients survive and thrive. It’s the system that’s broken. Understand how Noel-Levitz operates and you’ll understand why we can at once be putting more money into higher education than ever, indebting students more than ever and getting outcomes no better than they were decades ago.

America's tuition pricing mess
Image: Shawn G. Henry for Forbes
The father of enrollment management, Jack Maguire, thinks fat-cat colleges not enrolling more poor kids is a far worse sin than financial aid leveraging

America’s tuition pricing mess has a start date: 1992. In July of that year the reauthorisation of the Higher Education Act changed the way that the expected family contribution was calculated and made it easier for students to take out loans.

Meanwhile, an antitrust suit against the Ivy League schools and MIT established that colleges could no longer collude on a family’s need, a practice these schools had been employing for decades so that top students wouldn’t have to choose between them based on money. The late Charles Vest, one-time president of MIT, which was the only college to fight the lawsuit, argued for maintaining this seemingly clubby system, presciently warning that without it in place, there would be “wheeling and dealing and bargaining student by student, and there would be a shift of funds from those who most need it to paying for kids who frankly did not need it”.

That year also marked the modern emergence of Noel-Levitz, which was poised to foment this wheeling and dealing through what has come to be known as “enrollment management”—reams of data analysis that uses econometric modelling and behavioural finance to affect admissions, financial aid and student life. Enrollment management would change college admissions as radically as computer-assisted quants were about to change Wall Street.

In this revolution a theoretical physicist named Jack Maguire gets credit as enrollment management’s founding father. As a young dean at Boston College in the 1970s, he wrote an essay on how the then-struggling school, “through conscientious planning and measured decision making” could exert significant influence over its own destiny. The article was almost heresy, in the age when admissions decisions for elite schools were decided mostly by family connections or backroom discussions.

That wasn’t a luxury for BC, which was running a $1 million deficit and experiencing an exodus of transfers. Maguire took a look at BC’s enrollment data and figured out two things: Incoming transfer students were the key to financial solvency, and a more creative distribution of financial aid would help keep students around. “I made the argument that the transfers are actually mature students who might have made some unwise decisions but wanted to change,” says the 74-year-old. “They were a financial buoy to BC, but also they enriched the class.”

Prior to his arrival in the admissions office, BC’s departments were siloed. Admissions and financial aid, for example, were like church and state. The financial aid budget was simply divided evenly: A quarter allocated to each incoming class, freshmen through seniors, despite the fact that more freshmen were needed to maintain enrollment. Maguire reallocated the formula, giving one-third of the college’s financial aid budget to the incoming freshmen, and split the remaining two-thirds among sophomores, juniors and seniors.

After helping secure BC’s financial footing, Maguire started his own consultancy, Maguire Associates, in 1983—and more than a dozen competitors have sprung up around it. Maguire tried to recreate the collegial academic atmosphere he loved. Indeed, 12 of the 35 employees at his brick head quarters in Concord, Massachusetts have PhDs. Maguire himself holds a patent from the US Patent & Trademark Office for his data correlation system.

Compared to this ivory tower environment, Noel-Levitz is far more Dale Carnegie-earnest, its modest executive offices tucked away in a single-storey building near the University of Iowa research campus in Coralville. The current CEO, Kevin Crockett, joined as an associate consultant in 1992—he assumed the top job 11 years ago—and it was around that time the USA Group, a massive student loan guarantee agency, bought the firm. (USA Group was later sold to Sallie Mae, the largest student loan originator in the country. It’s now owned by a private equity firm, Quad Partners.)

Noel-Levitz has 220 employees and consults with 1,100 schools each year. Industry insiders estimate that its revenues top $35 million annually, but its influence over higher-education finance is several zeroes larger. “We don’t have any of those service areas where we’re working with just five schools, 10 schools,” says Crockett, referring to their eight specialties, ranging from student retention and digital strategy to direct marketing. In every area, he says, “we’re wor-king with 50 or more schools”.

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Despite their reliance on statistics, predictive modelling and PowerPoint presentations, Noel-Levitz consultants aren’t anything like the Ivy-educated job-slashers typically found at firms like Bain and McKinsey. Business-casual and midwestern-nice, the Noel-Levitz team doesn’t focus on cutting but rather on using the data to devise strategies that will ultimately extract more tuition. “I always like to say we’re helpers,” says 49-year-old Crockett, who carries an affable appeal beneath a linebacker’s frame. “We all believe passionately in higher education and the transformational impact it can have on people’s lives.”

Like almost all of his “helpers”, Crockett comes from within the industry—he was an admissions counsellor at Cornell College (in Iowa). In fact, he was working for Noel-Levitz part-time while still at Cornell—an ingenious strategy Noel-Levitz still uses with its 70 so-called “associate consultants”, who spend 99 percent of their time embedded at college admission and financial aid offices around the nation.

Collette Garrity, vice president of enrollment management for Dunwoody College of Technology in Minneapolis, spent six years moonlighting for Noel-Levitz while she held enrollment staff positions at other colleges. “I learnt a lot more about discounting than I knew before I started,” says Garrity, who spent a good deal of time strategising with clients on how to track conversion rates of students from prospects to applicants to enrollees. However, when it came to the more mathematically complex task of developing a predictive tuition-price model, Garrity would hand the client off to a product team at headquarters, which would pitch its proprietary Enrollment & Revenue Management System. The model can instantly predict, for example, that if you offer a $5,500 grant to 100 students in a certain income range from Philadelphia’s Main Line only 24 percent are likely to enroll. But when you bump the offer up by $500, to $6,000, 48 percent are likely to come.

To see how this process plays out, it’s instructive to go back to the Chicago meeting room where Galen Graber, a Noel-Levitz associate vice president, asked for a show of hands amid his doublespeak-titled seminar, ‘The Merit of Offering Merit Scholarships’. The event itself is called The National Conference on Student Recruitment, Marketing & Retention, but for some a better name might be the Tuition Maximisation Summit. Noel-Levitz runs it, kit and caboodle: Three days and 114 breakout sessions and workshops all designed to fill college campuses through mini courses like ‘Strategies for Recruiting High Ability Students’, ‘Web Analytics: Tips for Escaping the Data Rut’ and ‘Building Effective Pipelines for International Student Recruitment’.

College logos adorn polos, backpacks and baseball caps, and they reflect the kind of schools that lean heavily on “discounting” and “financial aid leveraging”. Journeymen schools in attendance go by names like Seminole State College, Criswell College and Aurora University.

When Noel-Levitz takes on a client, it takes the school’s admissions and retention data, scrubs it clean and uses the results to tell the school who’s coming, who’s going and who might be enticed to stay with a few more aid dollars or certain enhancements to student life. Their formulas might show the benefits of giving four well-heeled applicants with high SAT scores a 10 percent discount from its $50,000 tuition—rather than give one high-achieving, lower-income applicant the $20,000 scholarship she needs. The award of an extra $5,000 to rich kids might provide an ego boost that moves the needle—and bring in four students sure to pay the remaining $45,000 each year. That same $20,000 generated an additional $150,000 in relatively stable net tuition revenue. “One of the things that’s a hallmark of this company is we don’t fly around and give our opinion,” Crocket notes. “We always will back that opinion with data points.”

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If the whole idea of jacking up a price and then selectively discounting seems a bit nefarious, Crockett takes issue: “Students on campuses pay all kinds of different price points, just like people sleeping in a hotel or flying on airplanes pay all kinds of different prices.”

Noel-Levitz has an impressive list of testimonials that indicates that, for some colleges, it pays to operate like Delta. At Delaware State University Noel-Levitz grew the applicant pool by 10 percent, increased its enrollment by 27 percent, upped its retention rate (the percentage of freshman who make it to sophomore year) by 6.5 percent—and increased net tuition revenue by $4 million. Colorado Christian University can thank Noel-Levitz for raising the average GPA of incoming freshmen from 3.2 to 3.6 and reaching the highest enrollment levels in its 100-year history. Aurora University in Illinois credits the firm with increasing retention by 10 percent, doubling out-of-state enrollment and growing net revenue from $7.7 million to $9.8 million.

As anyone who has ever hired a consultant can tell you, it’s not a panacea. The University of Maine’s system, which includes seven colleges from Orono to Farmington, remains a work-in-progress. Plagued by an ageing population and a shrinking supply of high school seniors, the University of Maine System has spent more than $300,000 since late 2009 for Noel-Levitz’s help in solving its declining enrollment and net revenue shortfall.

The struggle remains. All campuses raised their tuition for two years after Noel-Levitz began its engagement, but they have since been forced to freeze tuition. With a budget shortfall projected to reach $69 million by 2019, the idea of merit aid for the middle class seems a fairly remote concern—instead, it’s hired an Australian firm, which uses commissioned agents to aggressively seek international applicants, most of whom, of course, pay the full sticker price.

Jack Maguire, the intellectual dean of enrollment management, has written a primer on his field that boils down to a formula: EM=C2. Specifcally, enrollment management (EM) is the result of a school’s “community of communities, or C2”. These communities include students, faculty and alumni. The problem with Maguire’s formula is that, as constituted, the system itself isn’t one of his communities. Professors and administrators and students can all thrive together in the short term. But America is most competitive if it educates the most promising students, in the most efficient way, incurring the least debt.

“I don’t know what we’re going to do,” says Georgia Nugent, the former president of Kenyon College and senior fellow at the Council of Independent Colleges, a group representing many small liberal arts colleges trapped in the inflate-and-discount game. “It’s been a creeping kind of cancer,” she says. At Kenyon, she says, they tried to do away with merit aid for mediocre rich kids, but bottomline concerns forced her to abandon the pursuit. “For every dollar that they’re ostensibly charging, colleges are getting 50 cents,” says Nugent. “It’s not sustainable!”

Anthony Marx, the former president of Amherst, no doubt remembers living with the luxury of an enviable endowment. Under his eight-year tenure from 2003 until 2011 tiny Amherst (endowment: $1.8 billion) more than doubled its proportion of low-income students and even went need-blind for international students, a population typically seen as the “pay full price” group.

Yet Marx, now the president of the New York Public Library, also seems to be relieved to be out of higher education. Specifically, the pressure to spend money on gyms, lazy rivers and other non-academic pursuits as a proxy for “quality of education”—a sure way to move up on various college rankings. “The need for financial aid continues to grow just to keep up with the sticker price,” says Marx. “So we’re sort of chasing our own tail.”

Maguire, of all people, says he has a solution, with a model used by another multibillion all-American cartel: Professional sports. Specifically, the revenue-sharing policies that have rescued the smaller market teams. To that end Maguire has suggested that the schools with the 50 largest endowments, a pool of $284 billion, should essentially tithe, donating a portion of their annual returns to a fund that could provide scholarships for students at less exclusive colleges. “One-third of an assumed average 10 percent yield would be $9.5 billion a year,” he says. “That would be enough to support full scholarships, at $30,000 on average, for 315,000 students or $10,000 in annual scholarships for nearly 1 million students.”

Given the distorted model in place, perhaps this kind of distorted solution has merit. So long as obtaining student loans is easy and universities continue to chase rankings by leveraging aid and beefing up campus amenities, published prices will continue to rise along with tuition discounts. Thousands of schools will continue to struggle, and enrollment consultants like Noel-Levitz will be more than happy to lend a helping hand.
 

WHAT’S YOUR TUITION DISCOUNT?

As nearly everyone is aware, the price of tuition has gone up and up and up. The average list price at a private college today, excluding room, board and books, is over $30,000 a year; at one in four it’s more than $39,000. People fail to realise, however, that outside of a handful of top schools, most offer generous discounts in the form of institutional grants based on student financial need as well as ability.

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Discounts are offered quietly and vary widely, but because buyers can’t know what they will actually pay until the acceptance letter arrives, many students don’t apply to schools that they should consider. Others apply to schools they can’t afford because they believe they will get sufficient aid, only to learn that the aid doesn’t materialise once they are accepted. Last year, for example, 26 percent of students who were admitted to their first-choice school did not attend because they received no financial aid. All of this puts undue stress on students and their families and leads to bad choices.

Since 2011 the government has required each college to post an online calculator designed to give prospective students an estimate of the aid they will receive and, therefore, what they are likely to pay. In many cases consulting firms like Noel-Levitz either provide the online calculators or help schools create the pricing models that power them. A good way to get a jump on what kind of discount you can expect is to test-drive the calculator on your target school’s website. You can even create ‘what if’ scenarios, adjusting your income, savings, and academic and extra-curricular attributes to determine different outcomes.

The table below shows financial aid leveraging in action: It displays the scholarship amounts (discount rates) you can expect from five top-rated colleges for two types of students, one from a family with an annual income of $300,000 and another from a single-earner family making a mere $12,000 a year. We tested two different academic scenarios: A supersmart kid scoring 1,540 on his SAT, with a 4.0 GPA and in the top 10 percent of his class, and a ‘B’ student scoring 1,250 on the SAT, with a GPA of 3.0 and in the top 50 percent of her graduating class.

As you can see all the top institutions except well-endowed Amherst offer discounts or ‘merit’ aid. Only Rensselaer Polytechnic Institute (RPI) diferentiates its aid on its calculator by the student’s intended major as well as by income and ability. RPI clearly wants more poets and is willing to pay for them. President Nixon’s alma mater, Whittier College in southern California, clearly isn’t eager to attract lower-income students. In our test it offered an additional grant of only $1,334 to the low-income overachiever. Even after its ample discount, the needy student’s family still has to come up with half the cost of attendance.

—Lucie Lapovsky

(This story appears in the 05 September, 2014 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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