Chapter 1: The Privatization of Public Higher Education

For much of the history of higher education in this country, public colleges and universities operated with an entirely different funding model and mission than private nonprofit colleges. In fact, the federal government helped states create public universities in the last half of the 19th century expressly to serve those who had been shut out of the elite private colleges that were in existence at the time—“the industrial classes.”¹

While the nation’s oldest private colleges such as Harvard, Yale, and Princeton catered primarily to the sons of the country’s most privileged families, public universities were established to provide “an uncommon education for the common man,” as James Angell, the University of Michigan’s longest-serving president, famously said in 1879.²

“Have an aristocracy of birth if you will or of riches if you wish, but give our plain boys from the log cabins a chance to develop their minds with the best learning and we fear nothing from your aristocracy,” he stated. “In the fierce competitions of life something besides blue blood or inherited wealth is needed to compete with the brains and character from the cabins.”³

States heavily subsidized public universities to keep the cost of attending low for their citizens. As a result, these institutions have long offered students from low-income and working-class families a gateway to the middle class or higher.

There have always been exceptions to the rule. In the Northeast, where elite private colleges reigned, states were less generous to their public universities, forcing these schools to charge higher prices to residents than did their counterparts in other regions of the country.⁴

In nearly every other part of the country, however, public universities kept their prices low enough that they were generally accessible for students regardless of family income. As a result, these schools generally did not award much institutional financial aid. Instead, they relied on the federal government and states to provide need-based aid to low-income and working-class students who needed additional assistance to be able to afford to attend.⁵

But by the 1980s, this low-tuition, low-aid approach was no longer working as effectively as it had been. States were starting to pull back funding for public universities, especially during recessions. Unable or unwilling to raise taxes to increase revenue and facing ever-growing health care and public safety costs, state policymakers left public universities with little choice but to jack up their tuition and fees.

As their schools’ price tags increased and funding for Pell Grants and other federal grant programs stagnated in the 1980s and early 1990s, public university leaders realized that they could not stay out of the student aid game anymore. To keep their schools accessible and affordable, they ramped up their spending on institutional financial aid.⁶

At first, public universities primarily used their aid dollars to meet the financial need of their students. In 1995–1996, the schools spent about $1.5 billion on financial aid, with 55 percent going to need-based aid.⁷ A 2011 report from the U.S. Department of Education’s National Center for Education Statistics (NCES) found that 13 percent of first-time students received need-based aid that year, while only 8 percent of non-needy students received so-called merit aid.⁸

But public university officials were far less committed to need-based aid than private college leaders had been because they had not taken part in its creation. Ironically, it was the leaders of elite private nonprofit colleges, which primarily served the children of the country’s aristocracy, who championed need-based financial aid.

In the aftermath of World War II, generous federal funding from the GI Bill encouraged private colleges to open their doors to less-advantaged students who had largely been shut out of their schools. By the 1950s, private college leaders recognized that they needed to become more systematic in their use of student aid rather than continuing to take a scattershot approach.⁹

To try to prevent schools from getting into a bidding war for the students they most desired, elite private college leaders embraced the notion of providing need-based financial assistance to students whose families could not afford to send them to college without the help.¹⁰ They directed the College Scholarship Service (an affiliate of the organization that is now known as the College Board) to develop a standard need-based methodology that private colleges were to use to award their institutional aid.¹¹ (The government eventually adopted a similar methodology to award federal financial aid.)

In their seminal 1998 book The Student Aid Game, higher education experts Michael S. McPherson and Morton Owen Schapiro wrote that these private college leaders had “a rather powerful and attractive vision of the role of student aid” that was akin to “an ideology.” The vision held that colleges would, with the government’s help, use financial aid to meet the full financial need of their students. At the same time, the schools would admit the most meritorious students, regardless of where their families fell on the income scale.¹²

“In this way, the claims of need were to be met by eliminating price as a factor in choice of school for needy students and the claims of merit were to be met by matching the most able and promising students with the best educational alternatives,” the authors wrote.¹³

But while the vision was attractive and powerful, it proved difficult to carry out. Private colleges that lacked the endowments of Ivy League schools had trouble meeting the full financial need of their students. By the mid- to late-1970s, private colleges’ commitment to this model began to waver as they struggled financially.¹⁴

Boston College, for example, was really hurting. With enrollment substantially down and hundreds of students leaving the school each year without graduating, the private liberal arts college was heavily indebted and on the brink of bankruptcy.¹⁵ To help deal with these crises, Boston College’s president put Jack Maguire, a physics professor, in charge of admissions. Maguire examined the problems with a scientific eye and concluded that using institutional financial aid to meet need exclusively was a fool’s errand for a college that could not afford to do so. In a 1976 article he wrote for Boston College's alumni magazine, he argued that the school would be better off using its financial aid dollars strategically to “yield the best possible mix of students at a reasonable expense.”¹⁶

He introduced the phrase “enrollment management” in the influential article to show how colleges “through conscientious planning and measured decision-making” could “exert significant influence over [their] destiny.”¹⁷ Such efforts, for example, required colleges to break down the firewalls that existed at most schools between the admissions and financial aid offices, as he had done at his institution. “Boston College,” he wrote “has recently been on the leading edge of the growing movement to reduce fragmentation by systematizing and integrating these fields into one grand design.”¹⁸

Maguire’s efforts met with such success that he left the school in the early 1980s to start a private consulting company to help other schools embrace this new field of enrollment management. But Maguire Associates had the field to itself for only a short while. Soon competing consulting companies, like Noel Levitz, RuffaloCODY, and Royall & Co., emerged to help spread these practices to private colleges across the country.¹⁹

And once some private colleges began using their financial aid strategically, it became difficult for others to resist for fear of being put at a competitive disadvantage. Throughout the 1980s and 1990s, enrollment management and the strategic use of financial aid (otherwise known as financial aid leveraging) spread like wildfire through the private college sector.²⁰

While public universities initially used their institutional aid primarily to meet students’ financial need, it did not take long for enrollment management firms—recognizing a lucrative market when they saw it—to approach public flagship and research universities and show them how they could benefit from adopting the enrollment management tactics of their private college counterparts.

For many of the public universities, it wasn’t a hard sell. By the 2000–2001 academic year, the 339 public universities that this paper examines provided 53 percent of their institutional aid dollars to non-needy students.

What accounted for this quick turnaround? Why were so many public universities attracted to using their financial aid for strategic purposes rather than to help students who could not afford to attend without the aid? The reason is quite simple. Using financial aid strategically to attract the students they most desired—typically the “best and brightest” and wealthy out-of-state students—provided public university leaders with a relatively quick and easy way to address the most pressing challenges their institutions faced. As outlined in New America’s 2015 report “The Out-Of-State Student Arms Race,” these officials saw that leveraging their financial aid could help them increase their revenue, fill their classrooms and dormitories, and boost their prestige.²¹

State Disinvestment

For public universities, there has been no bigger challenge than state disinvestment. Over the past several decades, nearly all states have slashed the per-student funding they provide these schools.²²

Declining state funding has left public universities looking for alternative revenue sources. One of the most attractive options that they have found is affluent out-of-state students. The allure of these students is obvious—they pay much higher tuition and fees than in-state students.²³

But why would a school spend institutional aid dollars on wealthier students? Does that not work at cross-purposes with raising revenue? While there is a cost, colleges find it worthwhile because providing four $5,000 scholarships to otherwise “full-pay” students is much more lucrative for the institutions than spending $20,000 on one low-income student.²⁴ These students will not only pay more overall in tuition than low-income students but they will also pay the full price for non-tuition expenses, such as room and board, books, and food. And they and their parents may eventually become generous donors to the colleges as well.

In addition, colleges know that offering “merit” scholarships (which most often come in the form of discounts off the tuition) is an extremely effective marketing tool. Students and their families love being offered scholarships because they see them as a reward for hard work, when schools are actually giving them out to improve their bottom line.²⁵

Demographic Challenges

Using non–need-based aid to lure out-of-state students is also attractive to public universities in states where the number of students graduating from high school is shrinking.²⁶ The biggest declines have been in the Northeast and the Midwest, where Illinois, Ohio, and Wisconsin are expected to experience especially sharp declines in the coming years.²⁷

Demographic challenges are expected to significantly worsen starting in 2025, when the total number of traditional college-age students is expected to nosedive.²⁸ If the projections hold, the competition for affluent students is likely to become even more intense, with public universities offering even larger discounts.

Rising Up the Rankings

Practical concerns such as maximizing revenue and filling classrooms are only part of the equation. As many have said, prestige is the “coin of the realm” at our nation’s colleges.²⁹ And that’s as true today for public flagship and research universities as it has always been for elite private colleges.

For schools like the University of Alabama, Miami University of Ohio, and Temple University, there has been no more important goal than rising up the U.S. News & World Report national university rankings, where public universities compete fiercely among each other and with the most elite private universities for the top 100 spots.³⁰ These schools annually spend tens of millions of dollars—and in the case of the University of Alabama, more than a hundred million—to buy top students with the impressive SAT or ACT scores U.S. News loves. Rising up the U.S. News rankings enhances the schools’ reputation and marketability with the upscale students they most desire.

Colleges that primarily use non–need-based aid to raise their institutions’ academic profile tend to give much larger scholarship awards than those that are simply providing tuition discounts to recruit affluent students to make up for declining state subsidies.³¹ High school valedictorians with high standardized test scores may receive scholarships that cover their tuition and room and board, and even stipends to conduct research.³²

To be clear, the goals of increasing revenue, raising prestige, and filling classrooms are not mutually exclusive. Many universities are trying to achieve these goals simultaneously.

A Self-Perpetuating System

Just as in the private college sector, the more public universities embrace enrollment management and use their financial aid strategically to lure affluent and high-achieving out-of-state students to their schools, the more pressure there is for their competitors to join the fray. They often feel they have no choice but to offer generous discounts and scholarships to stop institutions from grabbing up their best home-state students, who help them in the rankings.

The University of Wisconsin found itself in that position in 2015. To stop institutions from other states from poaching the best Wisconsin students, university officials announced that they had to become bigger players in the merit-aid arms race. “As far as I’m concerned—I’m an economist—that’s a real waste of where we should be spending our money in higher ed. But I’ve got to keep some of those top students in Wisconsin,” Rebecca Blank, the university’s chancellor, told Inside Higher Ed at the time. “We’ve got to play in that game. We just have to.”³³

Similar concerns reached a fever pitch last year in Illinois.³⁴ Alarmed by news reports that high-achieving affluent students are leaving the state in droves to attend schools that are offering generous amounts of non–need-based aid, the Illinois state legislature created a new $25 million merit-scholarship program that the state’s public universities must match.³⁵ And even though the state’s flagship university, the University of Illinois at Urbana-Champaign, continues to achieve record enrollments,³⁶ state officials were so spooked in the spring that schools like the University of Alabama are luring away wealthy suburban students with scholarships that they further expanded the program in June.³⁷

Enrollment managers say that often-heard concerns that the heavy and increasing use of non–need-based aid at both public and private colleges and universities is hurting low-income students are overblown. When criticized for engaging in such regressive practices, they claim that schools use the additional revenue they receive from wealthy out-of-state students to boost their spending on need-based aid.³⁸

But they provide little evidence to suggest those claims are true.³⁹ And in fact, this argument is largely a smokescreen. That is because under enrollment management, financial aid is not meant to be used to meet financial need. With enrollment managers focused on increasing their schools’ net revenue, meeting students’ financial need is actually considered inefficient and wasteful. Instead, enrollment managers use financial aid leveraging to determine the precise price points they need to meet to enroll different groups of students, without spending a dollar more than is needed. The best financial aid packages go to the students they want the most and to those who can help boost the institutions’ bottom line.

“[Financial] Aid leveraging is an analytical tool that enables admissions and financial aid administrators to estimate the amount of financial aid (regardless of formal need formulas) that would be necessary to increase the probability that a student with a specified set of characteristics would enroll,” Donald Hossler, an enrollment management expert, wrote in 2000 when he was the vice chancellor of enrollment services at Indiana University at Bloomington. “Although these financial aid inducements might be used to meet student financial need, the intent behind the strategy is to use the award as a merit award that will help individual campuses more effectively ‘court’ or recruit students with higher grades, with more talent, or with lower levels of financial need.”⁴⁰

In other words, under enrollment management, all institutional financial aid is considered merit aid. A significant sum will go to financial needy students (and thus be considered “need-based aid”), but seldom will these funds be used to fill all their need. To put it bluntly, leaving financially needy students with “unmet need” is part of the game plan to ensure there is enough money to pursue the most-sought-after students.

To make matters worse, financial aid leveraging is most effective when universities jack up their sticker prices so that they can provide larger discounts to the students they covet the most.⁴¹

Kevin Crockett, a senior executive with Ruffalo Noel Levitz who served as the company’s president for 11 years, came clean about this in an interview with The New York Times Magazine in 2015. “I’ve got to have enough room under the top-line sticker price,” Crockett stated. “A school that charges $50,000 is able to offer a huge range of inducements to different sorts of students: some could pay $10,000, others $30,000 or $40,000. And a handful can pay the full price.”⁴²

Enrollment management and financial aid leveraging have encouraged public universities to adopt the high-tuition, high-aid policies of their private college counterparts (although, of course, not at the $50,000 level), leaving financially needy students with larger funding gaps.

In the chapters that follow, this paper will take a closer look at the extraordinary growth of non–need-based aid at public universities over the past two decades and will explore how these policies have affected low-income and working-class students.