By Ronald G. Ehrenberg
The vast majority of American colleges and universities make admission decisions without considering the financial need of applicants. Only a handful of private institutions admit their entire first-year class need-blind and then fully meet the financial need of all of their admitted students through a combination of grants, loans and employment opportunities. These institutions tend to be our nation's most selective, in terms of entrance test scores, and wealthiest, in terms of their endowment per student levels and their flows of annual giving.
Why do these selective private institutions pursue such policies? In part it is because as nonprofits they are major beneficiaries of federal and state tax policies that reduce the federal and state income tax liabilities of donors who make contributions to them, thereby increasing the contributions they receive. These policies also exempt them from having to pay federal and state income taxes on their endowment earnings, exempt their property that is used for educational purposes from local property taxes, and allow them to borrow funds for educational facilities at lower tax-exempt interest rates. Because of all of these tax benefits, the public at large is subsidizing these institutions to the tune of literally billions of dollars of lost tax revenue a year and the willingness to do so is based upon the belief that the selective private academic institutions are yielding benefits to society as a whole. Because many of the leaders of society are graduates of these institutions and a well-functioning democratic society requires that leaders come from all socioeconomic backgrounds, these institutions have long understood that they have a special obligation to admit and enroll students from all socioeconomic backgrounds.
In spite of their policies, public attention was drawn at the turn of the 21st century to the fact that many of these institutions actually were enrolling relatively few students from lower-income and lower-middle-income families (as measured by the share of their students that were receiving Federal Pell Grants). The large growth in the endowments these institutions achieved during the 1990s allowed the richest, including Harvard, Princeton and Yale, to respond to this embarrassing information by substantially reducing the loan component of their financial aid policies. The other selective privates followed suit to the best of their abilities.
Political pressure was put on selective privates by the Senate Finance Committee in 2007 and 2008 when the committee investigated their endowment spending policies and floated the idea of requiring them to spend a specified minimum percentage of their endowments each year in an effort to increase the institutions' financial aid expenditures. The institutions responded by further improving their financial aid packages; the wealthiest eliminated all loans and the others typically eliminated loans for students coming from families with incomes below $60,000 or $75,000, as well as capped annual loan levels for other students.
The change in their policies did lead on balance to an increase in the share of students attending the selective privates who were Pell Grant recipients. But in 2008-09, the financial collapse and the Great Recession began to wreak havoc with their budgets. Declines in their endowments and annual giving substantially reduced their revenues. Declines in housing values and financial assets of families, along with increased unemployment and declining real incomes, led to substantial increases in the financial need of their entering classes. Financial aid budgets exploded and their growth paths could not be sustained.
In an effort to slow down the growth of financial aid budgets, a number of the institutions have responded by modestly increasing annual loan levels for students whose family incomes are above some threshold; in doing so they have sought to continue to guarantee access to their applicants with greatest financial need. Wesleyan University, whose financial resources are more limited than some of its competitors, made a dramatic announcement in June 2012 that until it could raise enough endowment to support its financial aid budget, it would admit the last share of its students (perhaps 10 percent next year) by only considering for admission applicants who do not need grant aid from the institution. That is, at least temporarily, it moved away from a full need-blind admissions policy.
In doing so, Wesleyan has courageously faced a moral dilemma. Increasing financial aid budgets are impacting on the resources the institution has to provide quality undergraduate education. Given the constraint on its resources, continuing to make admissions decisions without considering applicants' financial need would require Wesleyan to increase annual financial aid packages to loan levels that would both cause the loss of more accepted applicants to competitors and large loan burdens that might restrict graduates' career options.
So instead it has decided to bite the bullet in the short run and only admit "full-paying" applicants once it has exhausted the funds it has earmarked for grant aid. In doing so, it makes it highly likely, that at least in the short run, the reported share of Pell Grant recipients among its entering student body will decline and that it will appear to the outside world to be backing away from its social obligation to enroll a socioeconomically diverse student body.
Of course, Wesleyan could have continued to make all of its admission decisions need-blind and to admit the final group of students without providing any aid to them. It could have counseled the admitted students with substantial financial need who would not be receiving any grant aid about the large loan burdens they would have to assume to attend the university and could try to dissuade them from enrolling.
However, this would have placed the institution in a position of rooting against itself; first admit students, then try to convince them not to come, and if successful, then try to find more applicants to fill those unfilled seats in their class. And, if some of those admitted students did choose to enroll, the university would have to worry that their accumulating debt burden would reduce those students chance of successfully completing their degree and/or limit would their career options after graduation. Students talented enough to apply and be admitted to Wesleyan will be attractive to a number of other institutions and the small number of students with financial need who will be rejected by Wesleyan under its new policy should have other attractive college enrollment options.
I admire Wesleyan and its leaders for honestly confronting a morally difficult issue. Of course what is an optimal policy for an institution to pursue in a social sense depends upon what one's competitors are doing? If all selective private colleges and universities adopted Wesleyan's strategy, enrollment of students from relatively low-income families at these institutions would clearly fall.
Ronald G. Ehrenberg is the Irving M. Ives Professor of Industrial and Labor Relations and Economics at Cornell University and Director of the Cornell Higher Education Research Institute (CHERI).(Photo: Wesleyan University Emblem. Credit: Wikipedia.)