Why American Colleges Are Becoming a Force for Inequality

Higher education should be closing the gap between the rich and the poor. But college economics are driving them further apart

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We like to view higher education as the "great equalizer" that leads to social mobility. But selective colleges have long been accused of perpetuating class divides, rather than blurring them.

A recent landmark study by Stanford's Caroline Hoxby and Harvard's Christopher Avery lent further empirical evidence to this accusation, finding that high-achieving low-income students do not have access to selective schools. The study showed that the mismatch is due to a lack of knowledge, not quality. Low-income students outside of major urban centers do not even apply to the top-tier colleges for which they are qualified.

Many commentators and the study authors themselves have looked for ways to alleviate this mismatch. A follow-up study found that supplying basic information to applicants could substantially increase the number of low-income students applying to more selective schools. Just giving low-income kids packets of information helped them apply to better schools.

Yet while the information gaps are real and need to be addressed, there is a much deeper structural problem. If most top colleges wanted to be truly equitable, they could not be with their current business model. There is not a golden pot of low-income applicants that schools want but are failing to reach. Instead, many schools don't want more low-income students because they won't be able to pay for them without a major overhaul of school funding practices. Outside of the handful of super-elite universities with fortress endowments, colleges' finances are currently designed around enrolling a disproportionately high number of high-income students. These schools could not afford to support more low-income or middle-income students absent either a huge increase in tuition, a commensurate reduction in spending, or a dramatic change in public funding.

In fact, schools are already moving away from a more equitable system. Colleges actively recruit "full pay" students who can attend and will not need financial aid. A 2011 survey by Inside Higher Ed found that about 35 percent of admissions directors at 4-year institutions, particularly public colleges, had increased their efforts to target "full pay" students. Far from wanting to enroll more low-income students, colleges recruit more affluent ones who will pay full price to attend. A follow-up survey of college business officers found that the most common strategy to deal with financial challenges in the next few years was to "raise net tuition revenue." More than 7 in 10 college CFOs cited this answer. In other words, schools are becoming more reliant on the inequality in the system than ever before.

If colleges cannot even currently support their business model with enrollment skewed toward higher-income students, a fairer distribution would make the system completely dysfunctional. What's really holding back a more equitable distribution of access to selective colleges is the financial model of colleges. For systemic reform to work, the government will have to take a leading role in fixing incentives and stopping the college spending arms race in its tracks.

High-Aid, But Not Enough Poor Students

What would selective college populations look like if their student body perfectly reflected the population of qualified students? The short answer is: They would have many more poor students -- and it would wreak havoc on their finances.

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High-income students account for about a third of the high-achieving students graduating from high school (see graph above). But estimates suggest that 74 percent of students at the top 146 top colleges came from the richest quartile of households. The Center for Education Policy Analysis (CEPA) at Stanford looked at 174 top schools and noted that richest 20 percent of households were seven to eight times more likely to enroll in a selective institution than those from the poorest 20 percent, even though Hoxby and Avery's research suggests that a fairer distribution should be two to one. The CEPA team also found that the gap between the highest and lowest income groups in college enrollment has increased over time, "as more and more seats in highly selective schools have been occupied by students from high income families."

What would the current high-tuition, high-aid model look like with an enrolled student body that reflects the true distribution of high-achieving students?

At The George Washington University, right around the corner from my office in Washington, D.C., the advertised price is $58,985 for the 2012-2013 school year. For the more than 4,000 undergraduate students (out of about 10,000) who are judged to be unable to afford the advertised cost, GW provides an average of $36,789 in aid to offset this cost.

If GW's demographic profile matched the actual distribution of high-achieving students - that is, if there were one bottom-quartile student for every two top-quartile students -- GW's revenue would plummet by about 20 percent. The school would have to raise its tuition for students that are paying full price. But there would be far fewer of them. To take in the same amount of money as they currently do, GW would have to raise its price by approximately $30,000 per full-pay student, for a sticker price of about $90,000 a year. The actual increase would likely need to be more, given that families making $120,000 per year are classified as high income but cannot afford a college cost that would consume three-fourths of their annual income.

This is not a sustainable model. Colleges will not be able to raise sticker prices to these levels while preserving enough aid for low- and middle-income students. They will either raise prices across the board or recruit more affluent students.

Either way, the unequal system will remain.

How to Keep Prices Down: Be Really Rich

Not all colleges, however, would need to raise tuition drastically to pay for a larger number of low-income students. Schools with large endowments can cover the shortfall in tuition by drawing money from these reserves. But keeping tuition constant and paying more from the endowment is only an option for schools with monstrous endowments.

Many writers cite Amherst College as a success story, which has "aggressively recruited poor and middle-class students in recent years" and has increased its share of low-income students. But Amherst has a very large endowment for the size of its student body. Its strategy is only viable when backed with an endowment of more than three quarters of a million dollars per student from which it can draw additional funds to cover its costs while remaining competitive in its levels of spending.

Amherst is better than others, however. Some schools that already do have sizable endowments and could increase aid are instead decreasing it. Cornell, which has an endowment of about $5 billion, took $35 million from its endowment in 2009-2010 to fund financial aid. It is now changing its policy to draw less from the endowment, which includes lowering its financial aid policies.

For GW, with $1.33 billion in its endowment (about 1/18 of Amherst's per student), it's more difficult to use the endowment as a primary backstop. GW only has around 11.7 percent of its endowment, or $155 million, available for student aid. As such, GW - and most selective schools - would only be able to preserve student revenues by raising tuition.

The Public College Crisis

This problem is not reserved for private colleges and universities like GW. In fact, the problem is even worse at public universities.

In addition to competing with private schools, public universities are dealing with cutbacks in public funding as state governments turn to austerity to restore their balance sheets. State funding for colleges and universities dropped substantially after the 2001 and 2008 recessions. States are now spending 28 percent less per college student than they were in 2008, according to the Center on Budget and Policy Priorities, and the College Board reports that average state appropriations for higher education per $1,000 in personal income have declined from $9.74 in 1990 to $5.63 today. These budget cuts have forced states to raise their tuitions in turn. Over just the last 10-year period, combined tuition, fees, and room and board at public 4-year universities have increased 45 percent in inflation-adjusted dollars.

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Josh Freedman is a policy analyst in the Economic Growth Program at the New America Foundation.

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