Cohort-based budget planning for financial aid

Avoiding surprises and budgetary shortfalls

With freshman discount rates once again on the rise, it will be more important than ever for institutions to review whether their methodologies for developing a budget for financial aid are sufficiently robust.

Using a cohort-based budget approach is critical for understanding the implications of replacing a “cheaper” senior class with a more heavily discounted freshman class.

Consider, for example, the recently published NACUBO tuition discount rate study that included an estimated discount rate of 48 percent for freshmen at a private college or university in 2014, compared to 42 percent in 2010. If the freshman class of fall 2010 began when tuition was $20,000, the average institutional award would be $8,400.

Now, further consider a 3 percent tuition increase each year, with the average amount of the institutional award remaining at $8,400 over four years. By the time this class graduates in 2014, the average discount rate of the freshman class that entered in fall 2010 would be 38.4 percent—that’s $8,400/$21,855.

We know that there will be attrition along the four years but, for the sake of this simple example, let’s assume no attrition and a class size of 500. Those 500 students and their average $8,400 institutional award will be “graduating” for a total of $4.2 million in aid. They will be replaced by a new crop of fall 2014 freshmen at a 48 percent discount rate.

After the series of 3 percent tuition increases, a 48 percent discount rate for the 2014 freshmen would average $10,805. With 500 new freshmen, that’s $5,402,500 in aid—which is a $1.2 million increase over the 2014 graduating class.

The responsibility for this important budgeting process differs from institution to institution. In some cases, the director of financial aid takes the lead. At other colleges and universities it is the chief enrollment officer, and at still others it may be the chief financial officer or CFO’s designee.

Some institutions have been able to nail down this budget planning quite well, and others struggle. If your institution is in the latter category, here is a three-step approach to use as a guide.

Get the right people around the table

Regardless of who is ultimately responsible for budget projections, having appropriate representation from key offices is crucial. When considering the previous example of a “cheaper” class graduating and being replaced by a new class with a higher discount rate, it should be evident that financial aid and retention information are critical elements of the plan.

Therefore, a representative from either the institutional research or registrar’s office should be part of the team along with financial aid, enrollment and finance staff.

Christine Saadi, director of student financial planning at Alvernia University in Pennsylvania, has this to say about the need for collaboration: “We began to use cohort, trend-based financial aid/net tuition revenue [NTR] budgeting a number of years ago and we now have reliable historical information that is used in projections. Our office works closely with enrollment, finance and Institutional Research to consistently review and evaluate data to ensure we have correct information.”

Identify the data needed

At a minimum, the following information will be required:

  • Average institutional aid award for each cohort (that is, the average award for the entire cohort, not just the aid recipients)
  • Number of students in the cohort
  • Average institutional aid award per cohort as each cohort “cycles through”

At some institutions the average aid award per cohort changes very little as the students move from first to second year, second to third year, and so on. At other institutions, students with higher than average aid awards are retained at higher rates than are students with smaller awards.

Those differences may be significant enough to have a substantial impact on the aid budget. When factoring in retention, then, simply planning for the average first-year award to remain constant for four years may catch the budget office by surprise.

Put it all together

There are two general approaches that can be used to calculate and project an institutional aid budget, and both incorporate a retention component. The first is more straightforward because it includes only institutional grants and retention. The second, more sophisticated method includes tying in the associated NTR to the cohort trend-based budget.

Institutional aid-only example

For this analysis, the institution should attempt to gather at least three years of historical data and include, for each academic year, the number of freshmen, sophomores, juniors and seniors enrolled along with the average institutional grant/scholarship per class.

Once each subsequent year of historical data is collected, you begin to see how a cohort and its associated aid “moves through” over the course of a four-year or more time frame. Transfers will also have to be included in the aid budgeting process.

Some schools choose to filter transfers into their appropriate classes along with freshmen, while other institutions—especially those with large transfer populations—prefer to track transfer aid separately. It is important to eventually account and plan for institutional populations of students—part-time, adult, graduate, transfers and traditional freshmen.

Assumptions for cohort retention each year are included, which are typically based on three-year historical averages. Institutions that have a large group of “returning freshmen”—i.e. students who are no longer first-year but who have not yet progressed to sophomore year—often track this group in an extra row between the freshmen and sophomores. The same may be done for fifth-year seniors.

These latter options are examples of how an institution benefits from having the correct people around the table when discussing what is appropriate. Another important element of the projections will be to understand how to incorporate “deflation.”

Because of mid-year attrition, an entire year’s institutional aid will not be “spent.” Generally, it is sufficient to track the historical percentage of the total that is actually spent, which will assist an institution in clarifying what the final budget projection for the year should be.

If, for example, an institution spent $12 million of a $13 million budget for full-year aid, that amounts to 92.3 percent of the total calculated in fall. Three years of historical information should provide a reasonable average to use for this deflation projection.

Financial aid and NTR budget

This approach is more complex than the previous example, but along with that complexity comes additional important information about net tuition revenue.

It is especially helpful if an institution has a number of students who do not receive institutional grants because it calculates the overall discount rate and includes total net tuition revenue projections.

Here, the institution would want to have separate columns for each class/cohort for:

  • Total institutional grants
  • Number of students receiving institutional grants
  • Discount rate
  • Net tuition revenue
  • Gross tuition revenue
  • Average grant award
  • Number in each cohort (regardless of whether they receive institutional grants)
  • Conversion (retention) of previous year’s cohort

As mentioned, administrators often will separately track freshmen who have not made it to sophomore year.

Typically, it is more preferable or an institution to have the new or projected first-year class reported in a clear, obvious way by not mixing in students still categorized as freshmen who started a year earlier. That way, an intentional change in policy for new freshmen can be easily incorporated into the planning.

Mary Piccioli is an enrollment management consultant at Scannell & Kurz.

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