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State Aid Cuts

To replace or not replace, that is the question
University Business, May 2010

It is no secret. Most state budgets are in terrible shape. Estimates from the Center on Budget and Policy Priorities are that budget gaps for all states, combining fiscal years 2010 and 2011, will total approximately $375 billion. These budget woes have already begun to affect states' spending on higher education. Leading up to the 2009-2010 academic year, many states were considering or implementing plans to cut financial aid to college students. Some were in the news more than others.

In Michigan, where the economic downturn took hold long before it affected other states, cuts in state grant programs were deep. The big ticket item was the state's Promise Scholarship. In FY2009, funding for the scholarship was more than $80 million, and in FY2010, it was estimated to reach approximately $100 million before it was completely eliminated. In addition, two need-based programs were reduced by 48 percent. A variety of other Michigan college aid programs were reduced or eliminated. All told, the reduction compared to FY2009 was almost $140 million, or 64 percent. A proposal has already been made for next year to completely eliminate one of the need-based aid programs - the Tuition Grant - which is targeted to needy students at private colleges in the state.

In Indiana, the state grant budget actually increased slightly, but a 27 percent increase in the number of on-time aid applicants forced the state to reduce the value of the awards by 31 percent. Legislators did so by decreasing award caps in July, less than two months before the start of the semester on most Indiana campuses. Indiana Commission for Higher Education reports indicated that although award caps had been used as a rationing device since 2003, these cap reductions were unprecedented. A number of Indiana institutions stepped in to make up some or all of the funding shortfall that individual students faced.

Consider using the most recent award schedule, with a caveat about the availability of state funds.

And therein lies the dilemma. What is an institution to do when a state decides to reduce or eliminate state grant funding? Or what about a state that is considering cuts, but hasn't made decisions yet, and your packaging season is approaching?

Timing and certainty (or lack thereof) will make a difference in decisions an institution's leaders must make if state aid cuts are on the horizon. But even prior to that, senior leadership should have an understanding of the institution's exposure to changes in external resources. They should have hard data on the number and percentage of students who receive state aid and the amount of the average award. The same holds true for federal aid. How many Pell Grant recipients are there? How many of our students borrow? This is information that should be known beyond the boundaries of the financial aid office and disseminated annually to leadership, including to the board of trustees.

Here are three scenarios institutions have had to navigate and are likely to continue to need to address:

If your state is considering cuts to state financial aid programs that could impact your packaging for new students, not to mention returning students, there are a few things to keep in mind. First, the obvious: Find out as much as possible about what the state has proposed. What has the history been? Have aid cuts been proposed each year and rarely enacted, or is this proposal to reduce or eliminate aid new for your state? Financial aid officers should be communicating with other senior leadership on this issue to decide collaboratively on the approach to take.

If it is reasonable to assume state aid will be available, but the amount is unknown, consider using the most recent award schedule along with a caveat about the availability of state funds. Some colleges hesitate to include state funds in an award letter unless funding has been completely approved, based on the notion that the student will be impacted by the cut to state aid regardless of which institution within the state he or she attends.

Admitted students and their families are comparing award letters. If a competitor institution decides to list the estimated state aid and yours doesn't, it could put you at a competitive disadvantage. The financial aid process is confusing to many families. It will not always be obvious to a student that the same state grant is available. In many states the available grants are determined, in part, by cost of tuition, so a student may already be seeing varying amounts based on whether the award letter is from a private or public institution. Total grant is known to be a key factor in many students' decisions to enroll, so enrollment leadership must think through the approach and be even-handed based on the best information available. Yet, the financial aid office should not carry the burden of that decision alone.

In this scenario, an institution has a much better opportunity to use data to inform decision makers about how to proceed. Predictive modeling can assist in determining how much, if any, of the state cuts should be made up by the institution. Use statistical modeling to simulate the amount of total grant necessary to enroll the expected class size. By simulating a reduction in state grant, you can get a reasonable idea of how many students will not enroll if the entire reduction is implemented and how that will affect the net tuition revenue (NTR) of the institution.

Further, you can simulate, using statistical modeling, what changes to class size and NTR would occur if, for example, 50 percent, 75 percent, or 100 percent of the lost award amounts were replaced with institutional dollars. Depending upon the price elasticity of the admit pool, funding the reduction in state aid with institutional funds may serve only to decrease the school's bottom line. That is, if the admit pool is price in-elastic, enrollment would not be adversely affected by not increasing institutional grants to make up for state aid reductions. However, if the admit pool is price elastic - if increases to grants (or decreases in price) would increase enrollments sufficiently to generate more NTR - then making up some or all of the funding would make sense.

Funding the reduction in state aid with institutional funds may serve only to decrease the school's bottom line.

In some ways, this may be the most difficult scenario. Students have "committed" to the institution with an enrollment deposit and now your state is finalizing cuts to state aid. If the cuts are minor, there is probably not much to worry about. But consider the dilemmas faced by institutions in Indiana when large reductions to state grants to individual students were made in July. Would affected students pull out and opt for less expensive institutions or postpone college attendance altogether and work for a year?

In these instances, having already established how price elastic your population is will help guide the decision about using institutional funds to make up for some or all of the reductions. It is also important to understand what other institutions are doing, to the extent that your competitors will divulge that information.

Michigan State was able to fund approximately $8 million of the state's reduction and elimination of aid programs with federal stimulus money to assist more than 8,000 students who lost state grants. Rick Shipman, director of the office of financial aid, had this to say about funding a significant portion of the reductions: "The institutional mission includes a commitment to needy resident students that led to a decision to replace all of the lost Michigan Promise Scholarship for the needy students and the fall award amount only for those without demonstrated need. The Michigan Competitive Scholarship, which is based on demonstrated financial need and academic merit, was partially funded [by MSU]."

A number of Indiana institutions also opted to fund some or all of the reductions. Some made fundraising appeals to cover the new grant funds. Others dug deep into their "rainy day" funds.

What about next year?

Moving forward, Shipman says, "We are facing an increase in total cost of attendance of just under $1,000, no state financial aid to assist in these costs, a federal Pell Grant increase of $200, an overall increase in demonstrated financial need, and a 13 percent increase in institutional grant funds. ... We used the Financial Aid Strategy Tool (FAST) [from Scannell & Kurz] to determine the optimum level of institutional grant to offer students with various levels of need. We convinced ourselves we could reduce awards for some students without impacting their ability to enroll and use the freed up funds to assist other needy students. We are still feeling uncertain about what the future brings for us, but having data from a time-tested modeling tool increases our comfort with changing our fund distribution system."

One thing is for sure, many more institutions, public and private, will face these tough decisions over the next few years and beyond. The Center on Budget Policy and Priorities reports that at least three-quarters of states are cutting funds to higher ed operations and financial aid. There will be proposals for reductions, large and small. Some states will follow through, others won't. Clearly, using data to inform your decisions about how to respond is critical to the financial and enrollment health of your institution.

NOTE: FAST is a web-based modeling and simulation tool, available through Scannell & Kurz, that allows institutions to pinpoint effective, strategic use of financial aid.

Mary Piccioli is an enrollment management consultant at Scannell & Kurz, Inc. She can be reached via

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