Making Sense of College Dollars

April is the cruelest month in the financial-aid calendar. High-school seniors are receiving acceptance letters and their parents are trying to figure out where, or whether, or how, their children can go. Forms are due. Costs are catalogued and figures are totaled, and totaled again. And the phones in the financial-aid office start ringing, not to stop for nearly a month.

"Parents are in a very anxious period of time," says James A. Belvin, director of financial aid at Duke and a nationally recognized author and lecturer on the subject. "They feel, and I think correctly, that their student has done all she was asked to do. She did well in high school. She got admitted to a place like Duke. So the student has done her job. The parents feel like, 'If I can't afford it, I'm the failure--my child did the right thing, I need to do all I can.'

"It's a very anxious, very stressful time for parents, and it certainly is for us. As you can imagine, we are trying in this short period of time to do what's important. I describe it as the process of trying to create the possible."

The process is a familiar one to almost any parent. Taxes, income, expenses, unusual circumstances--some numbers go into standardized federal forms, some into hopeful, heartfelt letters, and all go into a file that lands on the desk of one of the financial-aid officers. Belvin describes what comes next as the "personal banker" approach.

"What we try to do is take a national formula that's not particularly personalized, personalize it, and give it individualized attention," he says. "We go through these formulas and we determine what those parents can afford to pay toward the cost of sending their child to Duke. We look at the student--can the student afford to pay some of it? What we establish is a budget, a full cost structure, and a student should be able to come to Duke and have a good year with this budget."

That budget includes parent contribution, student contribution, and the school contribution, which comes in a combination of loans, work-study jobs, and grants. (It may also include outside scholarships, and while by law those must be deducted from Duke's aid package, Belvin says his office deducts them first from the amount of loan and work-study required.) At Duke, the grants make up the rest of the family's "demonstrated need," or the difference between the budget and the family contribution plus loans and work.

"Some schools make no pretense about meeting need," Belvin says. "They'll say, 'Here's what we're offering.' Some schools will provide 90, 80, 50 percent. Theoretically, we've identified one dollar in resource for every dollar in cost the student will incur. That's really 100 percent of demonstrated need."

In the past, many schools could make that claim. However, Belvin says, the number has shrunk to "not more than fifty, and probably closer to twenty-five or thirty. Duke is one of the diminishing number of institutions in this country that meet full need and promise equal opportunity."

Promising equal opportunity has been a hallmark of Duke admissions, as stressed by public policy professor and former associate provost Charles Clotfelter '69, who has written extensively on financial issues in higher education. "Here's a respect in which Duke is very much on the high road--it is legitimately, honestly, and completely need-blind in its decisions on admission. That cannot be said for all selective institutions."

Nor, even in uncertain economic times, will that change. "President Keohane came on fairly strong on this point not two years into her tenure," Clotfelter says. "She said, this is one thing we're going to stick with. It's the right thing for our university."

At a meeting in February, the board of trustees also reaffirmed Duke's commitment to its need-blind admissions policy and need-based financial aid packages, through which four of ten Duke undergraduates receive financial assistance from the university. The annual average grant to a financial aid recipient is projected to be more than $19,500 in 2002-03.

"Because our endowment is not as large as many of the institutions in both the public and private sectors with which we compete for the best students and faculty, Duke depends on tuition income as a critical source of budget support," says Provost Peter Lange. Duke will be expending $36.7 million of its institutional resources for financial aid, up 8.3 percent from last year.

Lange also says Duke will not increase the amount that financial aid recipients are expected to provide through work-study programs or low-interest loans. This means that any additional increase in costs for students who receive aid from Duke will be covered through direct grants from the university. Lange notes that the university is continuing a new program expected to increase the international and socio-economic diversity of its student body. "We believe it is especially important that our students be exposed to people of different backgrounds and cultures, and, with the trustees' support, have initiated for the first time this year a program that will provide financial aid to support some twenty to twenty-five students each year from other countries," he says. "That will continue next year."

"As times have changed, as institutions--both public and private--have become more expensive, as resources have become more difficult to come by, many institutions have moved away from those policies," Belvin says. "The singular statement about Duke is that Duke has, through the years, made this commitment. It says that we are the kind of education that is for the brightest--once the student has demonstrated that they deserve to be here, finances should not hold them back."

This has value for the students, and for Duke as well. When a school decides that only the top 60 percent of its applicants will be deemed eligible for aid consideration, 40 percent have, in a sense, paid up front to get in simply by being able to afford to enroll. Says Clotfelter, "We have a challenging academic program, and at the end of those four years, you get a degree, and that has some value. Some of it is market value, some of it is nonmarket value, but it is value.

"It is in our interest to say that that degree cannot be bought in any way, either up front with money or with being more affluent. If we have to say, 'Yes, but the bottom third of the class doesn't have aid given to them,' that begins to take us away from being able to say the poorest young woman in the worst barrio of our country, if she exerts herself and shows promise, can get into Duke and her way will be paid."

This brings up a question, however, and it is one for which Duke has been seeking an answer. Does the cost of Duke--even with financial aid--create a privileged undergraduate student body? While the long-term answer might be changing, the short-term answer is yes, to the chagrin of administrators, who saw the figures they are working to change go national in a Wall Street Journal article last summer. The article, which focused on then-junior Julie Byrd and her economic circumstances, charged that Duke has "the worst economic diversity" among five similar schools in a 2000 survey--that it was a university of "haves and haves."

"It's recognized that the average income of families sending their kids to Duke is about as high an average as you're going to find at any institution," says Clotfelter. "We're not in danger of being overrun by needy students. And I think it's a legitimate criticism you could make, that Duke and many of its ilk don't give enough attention to the low-income non-minority student."

"You know as well as I do that Duke has a wealthy student body," says Belvin. "And we have a very, very poor group of students here as well. We've probably got 300 or so students whose parents can't afford to pay a dime. There are a number of students whose only [financial aid] expense is to work during the summer, and have work-study jobs during the academic year. There's no required contribution from the parents, because we've looked at the numbers and we understand that they can't do it. There are a surprising number of kids like that on campus."

One of the implications of The Wall Street Journal article was that while the poorest, most disadvantaged students received assistance and the wealthiest, most advantaged students didn't need any, some students from the lower-middle-class were falling through the cracks. While Belvin says financial-aid policies are sometimes necessarily constrained by federal requirements, his office exists not only to pass out funds, but also to help families manage the financial burden of college. "You can run into a parent who wants to pay for the first year the first year, the second the second, be done when the student graduates," he says. "That's nice if you can do that--it's probably not realistic for most families. Most of us are paying for everything with tomorrow's dollars.

"We view the entire student body as our constituent group. Even for families that have the resources and can afford to come to Duke, there can be a question of how they're going to pay for it," he says. The office helps families find loans, formulate a time-payment policy, uncover work options for the student.

"I do a lot of seminars around the country," he adds, referring obliquely to the recognition he has attained in the financial-aid world--a status perhaps best illustrated by his writings on financial aid on Marshall Brain's "How Stuff Works" Web page (www.howstuffworks.com/college-financial-aid.htm). "There were times when I used to start off by saying, 'We can help make Duke affordable.' Now I open all of these talks by saying, 'Paying for college is hard. It's hard, and nothing I can say is going to make it easy. Maybe I can help you make it easier.' It takes a lot of sacrifice on the part of the family--and if you go in with that expectation, it can make paying for college easier."

Duke's financial aid office isn't the only one going through this process, or making this kind of commitment. Parents are often looking over offers from several schools, making comparisons, sometimes even attempting to negotiate with the colleges. Financial aid has been based on the idea of a formula, a standardized method by which schools can take income and expense data and generate a number that approximates a family's ability to pay.

In theory, among schools with similar financial-aid policies, the offers shouldn't be too different. But in recent years, they have been, and as those differences have been apparent, there have been fears that some colleges were effectively using their aid packages to "buy" students, or at the very least were creating confusion for already stressed-out families.

The standardized formula, which had been in place in one form or another for decades, is described by Belvin as "pretty solid until 1992, when the feds decided that they would take a different approach. It really shook the standardized approach. There has been a concern in recent years that the need-based formula was falling apart--that fewer and fewer schools were using that formula in a standardized way, that schools were freelancing, that schools were looking at the formula but saying, 'Hmm, we really like this athlete,' or 'We really like this North Carolina kid, this really smart kid,' and they'd have a different formula.

"The value of the formula is that we're able to say to parents, 'We've got an approach. If you plan accordingly, if you save, if you do the right thing, we're going to be able to tell you what you can expect to pay for college.' That formula ought to have standard results."

Belvin gives an example of nonstandard results: a theoretical parent sending the same information to several institutions--Penn, Duke, Northwestern, and Stanford. "Each one came back and had a substantially different parent contribution than the rest," he says in illustration, going on to "quote" his theoretical parent. "Duke said it was five. Stanford said ten. Northwestern said twenty-five, and Penn said one. 'Crazy--I don't understand.'"

When it comes to these various offers, Duke has a clear policy. "The university does not 'negotiate' financial aid," reads a statement prominent in its literature. But the fact of having different offers might give parents the feeling that they need to comparison shop--and may increase their stress and indecision at this critical time.

"I'm an economist--I believe that individuals, including students who are applying and their families, can't be blind to incentives," says Clotfelter. "The empirical work on the behavior of applicants is consistent with the notion that they do pay attention to these offers: the level of the tuition, the so-called sticker price, and the net price, which is going to be the sticker price minus the grants minus the value of the loans."It would be an untenable position for the financial aid office at Duke to negotiate with parents who are shopping around for a better deal--'I got this much from Brown--what can you do for me?' That's the policy. We don't negotiate."

However, appeals are not frowned upon. The second part of the non-negotiation statement in financial-aid literature says, "We are anxious to consider any extenuating circumstances that affect a family's ability to support educational expenses and encourage applicants to write to us with dollar-specific details."

"If Parent X says, 'There's something you don't know about--we just lost this house because we lost this job,' then Duke goes back and does the figuring," Clotfelter says. "Now, having said that, a lot of people would say, 'Are you kidding me? The aid you're giving me, is that going to make it possible for me to send my child?' Over the past twenty years, we've heard that a lot from those in the so-called middle class--they say, 'You know, I've got to sell stocks!' I want to be somewhat sympathetic to that, but it really requires actual sacrifice."

Making matters more complicated for some top students is last winter's decision by Princeton University to spend an additional $16 million this year to change its financial-aid packages, eliminating student loans and replacing them with additional grants. Duke officials say Princeton's action, made possible by a $8.5-billion endowment, is neither possible to implement here nor desirable, as it takes an element of student responsibility out of the financial-aid equation. That concern was echoed by former Harvard president Derek Bok. As reported in The Chronicle of Higher Education shortly after Princeton announced its change, Bok said the move was "not a good idea for higher education--I think it represents a distressing tendency to focus on the quality of students on the day they arrive, rather than on what happens after they get there."

With all these factors swirling around every financial-aid decision arriving in an applicant's mailbox, clarity was lacking. In fact, the growing discrepancy between schools' offers was noted in a 1998 report from the National Commission on the Cost of Higher Education: "Higher education has a major responsibility to make its cost and price structure much more 'transparent,' i.e., easily understood by the public," it reads. "American families are confused and poorly informed, not only about costs and prices, but also about the entire matter of how to access higher education and its complicated system of financial aid."

Until the mid-1990s, to prevent price-fixing and collusion, universities had technically been bound by anti-trust laws and prevented from discussing financial-aid policies with each other. In reality, however, Belvin explains that some groups of schools held "overlap" meetings to ensure that parent contributions required by various institutions were the same, a practice stopped by a Justice Department suit. Then, in 1994, recognizing that need-based aid increased access to higher education, Congress passed the Improving America's Schools Act. Among other things, the act created an exemption to the anti-trust laws for schools with need-blind admissions policies, allowing them to discuss common concerns about need-based financial aid.

That exemption was Section 568 of the act, and in 1999, a group of twenty-eight university presidents whose colleges have need-blind admissions policies formed the 568 Presidents' Working Group. Duke's Nannerl O. Keohane was one of those presidents, and James Belvin took a lead role in the work of the commission. "The presidents believed that helping students, guaranteeing access, was critical, and that if we didn't find ways to support need-based aid, it could collapse," Belvin says. "We might end up in a situation where schools were basically saying, 'We don't really care about needy kids,' and needy kids would fall by the wayside."

Belvin and three other financial-aid directors from the schools in the group were asked to prepare background papers, position papers, and a proposal for a new formula. Taking the most recent revision of the old standardized formula, he says, the four set to work. "We've done a number of things that I think are important," he says. "We have developed a different way to count family assets. We've looked at family status. We also have recommended a new approach for dealing with home equity, for dealing with the number of children in college, and for verifying family income."

Last summer, the twenty-eight university presidents signed off on the new proposals, which included revisions in institutional methodology and a set of guiding principles. The partner schools have spent the current school year looking at how to implement the new formula, Belvin says, and it is scheduled to go into effect in 2003-2004.

"The tough part is probably next," he says. "Frankly, it means we're going to have to raise money, because it's going to cost us more. It's going to cost every school that participates more."

According to Belvin, the adjustments to the formula will increase aid eligibility and decrease the average parent contribution. "Duke meets full aid, parent contribution goes down, demonstrated need goes up," he says, outlining the anticipated new process. "Demonstrated need goes up, Duke's bill goes up."

"All of the presidents are fully aware of that," he adds. "It was very clear--if you implement this formula, it will cost your institution more money. But it gives us the chance to do the right thing."

Still, it is a large commitment, one of Duke's biggest budget items--$42.6 million for need-based aid and merit aid programs in fiscal 2001-2002, excluding loans and work-study support. With the new formula in place and a continuing promise to meet 100 percent of demonstrated need, the funds have to come from somewhere. Prominent endowments make Duke's prestigious merit-based scholarships possible--and others go into the need-based pool.

"We have a huge number of endowments within the need-based aid programs--hundreds. Some of them small, some of them large," Belvin says. "We're taking the endowment income and we're using that income to meet demand. Unfortunately, our endowment is considerably smaller than the institutions with which we find ourselves competing. So Duke is having to put an awful lot of current income into financial aid."

While the Campaign for Duke is raising the funds necessary to help meet the goals of the 568 group and of the university's strategic plan, "Building on Excellence," the current economic downturn may have an effect on resources, and on need as well. "It will certainly make a difference--we have already seen an increase this year in the number of students who qualify for aid," Belvin says. "I suspect that the numbers will continue to increase. Resources are a different matter--the economy will not increase those, but it will increase the amount of money Duke must spend on supporting needy students."

Regardless, not only is Duke standing by its guarantee of need-blind admissions, but with the new 568 principles set to go into effect, is prepared to spend more to help students.

"We believe in need-based aid, and reaching out to those who could not otherwise afford an education at a place like Duke," says Belvin. "We want the diversity that our office can provide. And what the 568 program can do, I hope, is set a new standard for what financial aid can be. If we can eliminate the confusion, we can encourage families to see that there really is a chance to send their student to an institution like Duke."