Despite the fact that donors have few direct means of contributing to individual students, the need for financial aid is huge and growing. Each fall, approximately 2 million high school seniors apply to college[1], and each of these new college students need to secure tens of thousands of dollars to pay for their educations. In addition, all of these students are competing for funding with the roughly 18 million[2] students who are already in college, transfer students, and post-graduate students. And the demand for college financial aid extends even beyond these groups, because many more thousands of students do not apply to college in the first place, assuming they cannot afford it.
Not surprisingly, where many students end up matriculating is a function not only of which schools are best for them, but also of where they are able to secure the most aid. As an example, a New York Times article from 2006 highlighted the story of Lindsey Mackney, a student who was choosing between Boston University and Allegheny College. B.U. offered little aid, whereas Alleghany offered a significant merit scholarship. "'Ultimately,' Ms. Mackney said, 'I came here because of the financial aid package.'"[3]
A large percentage[4] of college students rely on some form of financial aid to get themselves through school. And of course, with college tuition and general living costs rising rapidly in recent years, the percentage of students needing financial aid is expected to rise with it.
Currently, students have five main sources of financing for their education:
- Self-financing and financing from family
- Government-provided grants or loans
- Financial aid packages provided by colleges
- Third-party need-based or merit scholarships
- Private loans
Most students rely on some combination of many of these, but as closer inspection reveals, none of these provides an efficient way for students to secure education funding. Each option yields significant disadvantages:
Self-financing and financing from family
Many American parents save to finance at least part of their children’s college education. However, inflation in college tuition and other education-related expenses has left many families with the realization that the money they saved cannot cover even half of their child’s expenses. And of course, even families that are in solid financial standing after putting one child through college end up struggling mightily to pay for their second or third child, or to support a first child interested in pursuing a graduate or professional degree.
In order to make up the difference between what they can afford and what they need to pay, many students turn to help from the state or federal government. While college-specific financial aid provides money for students’ education, the bulk of student aid still comes from monies provided by the federal government. However, for most students, federal Pell grants or low-interest loans are rarely sufficient – or available – to cover their costs. Loan interest rates have risen in recent years, making them an imperfect answer. Meanwhile, federal Pell grants that are geared only towards low-income families often leave many students out to dry whose family incomes lie above the government-qualifying threshold.
Financial aid packages provided by their college
After government-provided funding, most students turn next to financial aid provided by the schools they apply to. Most every college has some form of financial aid that they distribute to their students in the form of a collection of loans, grants, and other scholarships. However, the availability and quality of such financial aid varies wildly from school-to-school. As a result, the decision of where many students go to college is often dependent on financial aid packages instead of other important school characteristics. As alluded to earlier, it is not uncommon for students to forgo going to a higher quality learning institution, or one that offers better opportunities for their interests, for a college that provides better aid.
But school financial aid packages are imperfect in another crucial respect: there is little guarantee that colleges distribute money in an efficient manner. Even schools that have significant resources are subject to many factors when allocating money, including internal political concerns, whether a student is an athlete or child of an alumnus, and so on. While all of these factors are reasonable for financial aid offices to consider when distributing available grants and loans, there is little guarantee and accountability that they are doing so in a smart and efficient manner.
Third-party need-based or merit scholarships
For ambitious students who still need financing, there also are opportunities to apply for funding from scholarship funds or corporations. However, identifying eligible scholarships is a very onerous process, as students must invest huge amounts of time searching for relevant opportunities, and then applying one-at-a-time to each program.
The search costs inherent in this process are particularly great when taken in tandem with the effort required to apply to college itself. In today’s super-competitive educational environment, it is not uncommon for students to apply to more than 20 schools. To then secure significant scholarship money requires sifting through available opportunities, filling out dozens of additional application forms, answering many essay questions, and obtaining many letters of recommendation. With the timeline for many scholarship applications a year (or further) in advance, many students who decide to apply find they began the process too late. And of course, other students do not even make it this far, with the complexity of the process serving as an unnecessary deterrent.
But even for students who are willing and able to put in the time and effort required to search for scholarships, many will find themselves ineligible for most of the third-party scholarships in existence. For example, students from middle-class backgrounds may find themselves not “needy enough” for need-based scholarships. Many intelligent youth applying for merit-based scholarships will find few opportunities for funding because they are not Harvard-bound. And other driven students who play musical instruments but are not concert-ready, or play soccer but not at varsity level, will find little funding as well. Not surprisingly, the world of third-party scholarships contains a significant bias towards students who are uncharacteristically brilliant or particularly needy. This leaves the majority of students with little in the way of third-party money to be found.
After all of the previous four methods of payments have been utilized, students are faced with a choice to either not go to school at all – the option chosen by thousands each year – or to apply for bank loans. Many students and their families are confronted with high rates of interest that have the end effect of leaving students with large amounts of debt after they graduate. The need to repay this debt in turn provides a disincentive for new graduates to seek jobs that allow them to pay off that debt, rather than jobs that they are interested in. This debt often results in taking jobs altogether distinct from their fields of interest, which in turn can lead to underperformance, depression, and a dearth of college graduates in lower paying, though still socially important, fields.
[1] We estimated this number from a few different sources. According to NPR, 3 million high school seniors graduate each year, while The College Board reports that about 75% (~2.25 million) of those students go to college. Because US News and World Report says that 1.5 million students took the SAT in 2007, it seems that a reasonable estimate is that 1.5 – 2.25 million students go to college each year.
[2] http://www.census.gov/prod/2007pubs/08statab/educ.pdf
[3] "Aid Lets Smaller Colleges Ask, Why Pay for Ivy League Retail?" The New York Times, http://www.nytimes.com/2006/01/01/education/01merit.html, 1 Jan 2006.
[4] Close to 60% of students are reliant on financial aid from their college, and many more receive aid in the form of government grants. "Colleges Giving More Financial Aid to Wealthy Students," http://www.educationsector.org/analysis/analysis_show.htm?doc_id=336982, 24 Jan 2006.