Financial Crisis Sends Tuition Costs Sky-High as Colleges Face Crunch

Students are often the last ones given a seat at the budget table when times are good, and the first to be put on the table when bearish economies (or the desire to give tax breaks to millionaires) necessitate painful budget cuts. Certainly, this was the case in the so-called "raid on student aid" in 2006, and is part of the reason that a recent report awarded every state in the country, except for California, an "F" when it comes to college affordability.

Economic turmoil is taking a serious toll on college and state government budgets, and most students are already feeling the pinch of austerity. Not everyone is suffering equally, however: low and middle income students are particularly vulnerable in the current economic environment.

States across the country are getting hit hard by shrinking tax revenue, and are finding themselves in the red for the upcoming year. That means that they will, or already are, under pressure to slash college budgets, and possibly even trim state student aid programs. The cuts to higher education will, in turn harm public colleges which will need to turn to other sources of revenue.

These alternate sources of revenue will be much more limited than in the past, however, and this spells trouble for students at both public and private colleges. Endowments are taking at beating as the stock market, real estate market, and other markets plummet. The near-frozen credit markets are causing cash-flow problems at some schools.

That leaves one major source of funding for colleges and universities: get students to make up the difference. While a few colleges have temporarily frozen tuition, most colleges will be looking for ways to pass the buck onto students or their families. Colleges are trying a combination of tuition hikes, enrollment cuts, and diminished student aid and services.

There are always a large number of students that find a gap between the amount of federal aid they are awarded and the full cost of attendance. If a school does not step in and fill the gap with its own funds, that student may just have to find a different, cheaper school, or forgo higher education altogether.

This gap can be the intended consequence of a calculated strategy. Many schools use student aid and tuition discounts to maximize the number of (wealthy or dangerously indebted) students paying higher portions of the tuition bill. It is called "financial aid leveraging." The Atlantic once explained how it works very well:

Take a $20,000 scholarship -- the full tuition for a needy student at some schools. Break it into four scholarships of $5,000 each for wealthier students who would probably go elsewhere without the discounts but will pay the outstanding tuition if they can be lured to your school. Over four years the school will reap an extra $240,000, which can be used to buy more rich students -- or gifted students who will improve the school’s profile and thus its desirability and revenue.

In other words, wealthy students tend to receive larger student aid packages on average from their schools than low income students do. Additionally, many colleges will be under more pressure to drop "need-blind" policies, where schools do not consider financial need as part of the admission process,, and "full-need" policies, where schools guarantee that all students will have their financial needs met. Both tend to benefit low-income students. Tufts University, for example, told the New York Times that they may no longer be able to afford to be need-blind policies.

This comes at a time when competition for admission and financial aid is high. Both the number of students applying for financial aid and the average amount of documented financial need is increasing. This means that low and middle income students, who usually do not have the benefit of SAT prep course, tutors, private schools, and other advantages, will have a harder time getting admitted this year. Utimately admitted students will be competing with many others for a slice of the same student aid pie.