# A Billion-Dollar Problem

October 30, 2014

Bloomberg Philanthropies announced this week a new effort to help talented low- and middle-income students enroll in and graduate from top-tier colleges and universities. While every intervention is welcome, this one assumes that a major problem is getting these students to apply to these institutions. In fact, the real problem is that colleges can accept more of these students only by reallocating resources to need-based financial aid. And while the \$10-million commitment to increasing awareness and applications is welcome, it is really a billion-dollar problem, not a million-dollar one. If the billion-dollar problem isn’t dealt with, the million-dollar investment will largely be wasted.

Here is the simple math. The project is targeting about 65,000 talented students annually from the bottom half of the income distribution who are qualified to attend about 265 selective colleges that do not currently enroll these students. Using data from Vassar College as an example, our average annual grant for financial-aid students is about \$40,000. If Vassar is similar to the other colleges in this group of 265, the financial-aid costs of admitting an additional 65,000 students a year after four years would be \$40,000 times 65,000 times four, or \$10.4-billion. Of these 265 institutions, some are publics. Their financial-aid costs may be less, so this number may be overstated, although the \$40,000 grant number is for all financial-aid students at Vassar—not just those from the bottom half, whose needs are greater. Even if overstated by 100 percent, we’re still talking about a \$5.2-billion-dollar problem.

Another way to see this: Vassar has increased its share of students on financial aid from 45 percent to more than 55 percent over the last eight years. The financial-aid costs of this for one institution with only 2,400 students is \$10-million annually, which is the total committed over two years by the Bloomberg Philanthropies for the new effort.

Without solving the billion-dollar problem, this new effort will lead to limited progress. Some very talented low- and middle-income students will now find their way to the most selective colleges, which are a better match for their talents. But here we come to the heart of the matter: If financial-aid constraints cannot be relaxed, many of the increased number of high-ability, low-income students who apply will be rejected. Of the top 150 endowed private, nonprofit colleges and universities, which are among the most selective in the country, only about a third offer need-blind admissions—making admissions decisions without regard to students’ financial-aid needs—and meet the full need of admitted students. So, already, high-ability low-income students are either being rejected or not offered enough financial aid to attend top-tier colleges because of their financial need. More applications will just exacerbate this problem.

Perhaps the Bloomberg group’s proposed convening of college presidents can help deal with this problem. Greater commitment to allocating resources for need-based financial aid has to be part of the solution. And it is a collective-action problem because colleges compete with one another to attract talented faculty, staff, and students. Every dollar they allocate to financial aid is not available to spend on other priorities, such as competitive compensation, small classes, equipment for laboratories, renovated dorms, or new athletic facilities. These other priorities help elite colleges recruit and retain the talented students who don’t have financial need and the faculty and staff who affect the quality of the education that the colleges offer.

An alternative to collective action on the part of colleges and universities: Amend public policy to change the incentives that colleges face in these resource-allocation decisions. Colleges all benefit significantly from their nonprofit status. They all receive some combination of public appropriations, access to federal grants, and special tax treatment, while students have access to Pell Grants and subsidized federal loans, and donors benefit from special tax treatment for their charitable contributions to colleges’ endeavors.

Policy makers should ask certain results from colleges in exchange for that support. Increased access for talented low- and middle-income students would be completely reasonable, and if we are serious about access, much needed. One of the justifications for a government role in higher education is equal opportunity and fairness. But much of the support has instead been used to improve quality for students who already have access. Better-targeted policies could change the incentives that colleges face. This could be more effective than relying on voluntary actions that involve difficult trade-offs, given the desires of selective colleges to attract talented students and faculty.

Increased awareness about and more applications to selective institutions from talented students in the bottom half of the income distribution are important. Absent significant increases in need-based financial aid, however, this latest \$10-million investment will be largely for naught.

Catharine Hill is president of Vassar College.