It's no secret that universities are facing a difficult financial future. Federal & state funding is on the decline, expenses are rising and nation-wide enrollment projections are gloomy. In order to grow or at least sustain enrollment numbers while staying true to their mission and admissions standards, schools have to decide how much scholarships to offer to each admitted student. Done well, an institution can successfully provide affordable, high-quality education to its students while growing enrollment revenue and protecting its operating budget. Done poorly, an institution may miss enrollment targets, sacrifice on their admissions standards, see losses in revenue per student, or a mix of all three.
Managing this well requires understanding of how funded and unfunded aid works, and how universities can adopt best practices to protect their financial future.
There are many kinds of scholarships out there. Today we're focusing on the types of scholarships that a college or university might offer to a student: so-called "institutional" scholarships. This excludes federal & state aid (i.e., Pell Grants, state-administered "Promise" scholarships, etc.), as well as private/outside/external scholarships (i.e., Coca Cola Scholars, Gates Scholarship, Dell Scholars).
From a university budget-perspective, these institutional scholarships come in two flavors: "funded" and "unfunded". A funded scholarship is typically "funded" via donor scholarships, or other endowment income specifically set aside for financial aid. Unfunded aid, however, is a type of tuition discounting where an institution foregoes revenue in order to incentivize enrollment.
Here's an example: let's say cost of attendance for a particular student is $45,000. They pay $20,000 between their family contribution and student loans. The remaining $25,000 was covered by scholarships. Most institutions want to make sure as much of that $25,000 is coming from donors, so they can recognize as much revenue as possible. If that scholarship is unfunded, then the university is "losing" $25,000 in potential revenue they might have gotten from another student that was paying the full cost of attendance.
Therefore, it is possible to increase the amount of scholarships you're offering to students while also improving the bottom line, so long as that increase is coming from funded aid. The growth of unfunded aid, however, can spell a dangerous path for institutions pursuing growth, but at the cost of lower revenue per student.
The process of replacing unfunded aid with funded aid is often called "scholarship swaps". Most often, schools will promise scholarships in the form of unfunded aid to students to incentivize admission and improve yield & retention. Later, after the students have enrolled, the institution's financial aid office will look at what donor funds can be applied and swapped with the unfunded aid, depending on the students' characteristics and the restrictions on the funds set by the donor. This can be a highly complex, manual and error-prone process but is one that is increasingly relevant. We cover the pros & cons of this process below.
+ Pro: Financial Stability
Institutions can see an annual bottom line savings of hundreds of thousands, if not millions of dollars, from implementing this process.
- Con: Operational Challenges
Typically, this can be complex to manage as it requires manual scholarship matching, several databases, cross-team collaboration and a high degree of coordination. It is highly recommended to invest in affordable and modern technology to support this process.
+ Pro: More Students & More Flexibility
By performing scholarship swaps, your institution can increase its revenue per student, and reallocate budget savings towards other costly areas of operation, like investing in instruction, student support services or additional recruiting and enrollment initiatives.
- Con: Communication Challenges
It's important to communicate the why and the how behind scholarship swaps to key constituents like donors and students. If you are swapping unfunded aid for funded aid mid-year, for example, and are then asking students for thank you notes for a particular donor, be sure to explain what has happened and what, if any, change has been made to that particular students' overall out of pocket cost of attendance.
In summary, scholarships are an important driver of the university budget. At many institutions, it's a multi-million dollar line item in the budget that should be treated as such, ensuring all efforts are made to grow the rate of funded aid, which typically requires high utilization of donor funds.
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