Breaking the Financial-Aid Equation

After a long and sometimes complicated process, most college-bound high school graduates now know where they will be in September. Similarly, most colleges and universities have filled their classroom seats with a freshman class large enough to keep them financially afloat for yet another year.

Yet it is worth noting that institutions of higher education and their potential students are waging an increasingly complex and costly war of information. Ironically, these practices result in less, not more, information. And colleges, students, and parents are paying the price.

It started with the implementation of what is sometimes referred to in business as "yield management." This practice attempts to get from every buyer no less than the maximum he or she would be willing to pay for a particular product or service. In higher education, this translates into offering the minimum possible financial aid that will still ensure the applicant will be a part of an incoming class.

How does it happen? High-priced consultants using sophisticated econometric and statistical techniques develop models to predict whether a particular student will accept an offer based on his or her personal, socio-economic, educational, and demographic data. Besides the obvious information gleaned from financial aid forms, they provide crucial tidbits:

*Did she visit the campus for a tour and an interview?

*What does he intend to major in?

*Has she applied for early admission?

This information is factored in to derive elaborate equations that help generate the minimum financial-aid offer that might be just enough to induce that student's interest. This process gives the university (or, in economic terms, the supplier/producer) the upper hand.

Historically, when buyers feel overpowered, they fight back. Students and their families can hire their own advisers to offset the information monopoly of colleges. The New York Times recently reported that 40,000 freshmen used the services of such consultants last year. These advisers tip them off as to what the college is looking for - which major field, biology or philosophy, for example, is likely to generate the most in tuition assistance.

The impact on behavior is fairly predictable. Buyers and sellers each commit resources toward finding and then concealing information. Colleges search for as much information as they can obtain on their applicants while employing a set of standards in their decisionmaking process unknown to the very applicants they're trying to attract. High school seniors and their parents, meanwhile, search for the best college, wondering exactly how much to reveal about themselves. In their own self-interest, students may attempt to distort the truth in order to maximize a financial-aid offer. As tuition levels continue to skyrocket, the incentives for such behavior are too significant to ignore.

Increasing levels of resources are being committed to make up for the secrets and half-truths. The long-term repercussions on the admissions process can only be detrimental. It also introduces students to their first college lesson: Telling the truth may not be the best policy.

Perhaps colleges should be more forthcoming about their methods for allocating scarce dollars for financial aid. Perhaps an independent agency could collect and publish all relevant data, including scholarship information from previous years, that would realistically inform students and their parents about their chances for aid. Colleges might also agree among themselves to automatically reject applicants who are guilty of falsifying information. Guidance counselors should be warned that any pattern of deception on their part will seriously hurt future candidates from their high schools.

While some of these safeguards may already be in place in some areas, more needs to be done to reverse the trend. Otherwise, neither the colleges nor the applicants - only their consultants - will truly benefit.

* Robert A. Rosenthal is professor of economics at Stonehill College in North Easton, Mass., where he directs the Center for Regional and Policy Analysis at the Joseph W. Martin Institute.