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What is the relationship between tuition and financial aid?

What is the relationship between tuition and financial aid?

As we emerge from the extreme financial pressures of the Great Recession, it is time for board members to take a step back and think about long-term strategies for ensuring that financial aid policies are consistent with institutional mission at the same time that they serve fiscal and enrollment goals. The following question originally appeared as part of "Financial Aid and Enrollment: Questions for Boards to Consider" by Sandy Baum. In this white paper, Baum explores the implications of long-term planning for financial aid through the lens of the board's role.
What is the relationship between tuition and financial aid?

When institutions raise their tuition prices, they are likely to spend more on need-based financial aid because of the larger gap created between ability to pay and sticker price. They may also spend more on non-need-based aid, designed to encourage students with particular characteristics to enroll.

Questions Board Members Should Ask
How do trends in tuition prices and net tuition revenues compare over time at your institution?

How has the percentage of students receiving institutional grant aid and the average aid they receive changed in recent years?

Is there evidence that financial aid is bringing in desirable students who would not otherwise enroll?

Institutional grant aid creates a gap between the sticker price and the net price students actually pay to institutions, as well as a gap between gross tuition revenue (tuition times number of students) and the net tuition revenue the institution actually receives. Increases in institutional grant aid may reduce net revenues by simply lowering the prices students pay, or it may increase net revenues by bringing in more students.

Of critical importance, increases in financial aid accompanying tuition increases are sometimes so large that the institution does not generate any new net tuition revenue. It is net tuition revenue—not the amount of financial aid or the percentage of gross tuition dedicated to financial aid—that determines financial strength.

To help institutions and boards better understand their own financial aid policies, AGB collaborated with the National Association of College and University Business Officers (NACUBO) to create Looking Under the Hood: Institutional Aid Benchmarking Tool. Begin exploring it today!

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