Why the Rebound in the Economy Is Bad for Scholarship Applicants

When the economy was in free fall early in 2009, officials at hundreds of private colleges felt a little panic: How would they find enough qualified students willing to fork over anything close to their sticker prices, which average $35,000 a year? (And that's before books, transportation, and other extras.) So they dramatically increased the amount of grants and scholarships they offered to students accepted into their classes of 2013.

John Strassburger, president of Ursinus College in Collegeville, Pa., and chair of the Board of Directors of the Council of Independent Colleges, a group of about 500 private colleges, says some financial aid officers now believe they went overboard last year. Now, as economists are beginning to identify signs of an economic rebound, many private college financial aid officers are planning to be a little stingier with aid offers to next fall's freshmen.

[Slide show: 8 Steps to Getting Cash for College]

That's creating a double whammy of bad news for anyone hoping for a scholarship. While the federal government raised the maximum Pell grant by $619 this year, and plans an additional $200 increase next year, that good news is being dwarfed by other looming cutbacks.

College aid officers are planning to ratchet back offers under the belief that families can afford more than the colleges had estimated last year. And the improvements in the economy haven't yet benefited many state and charity budgets. In fact, budget-cutting states are raising tuition at public universities and, often, reducing scholarships. California undergrads have been protesting the University of California's plan to raise student fees by about 32 percent, or about $2,000, over the next year, for example. And Michigan lawmakers are debating whether to eliminate that state's Promise scholarships of up to $4,000.

All this means many of next year's crop of incoming freshmen, especially those who are not spectacular students, will most likely have to pay a little more to attend colleges such as Ursinus.

Worried about the recession, Ursinus increased its aid budget by 15 percent earlier this year. This spring, a few dozen more scholarship freshmen accepted offers from Ursinus than the college had expected. So as the college prepares for next year's budget, Strassburger expects to increase aid by only about 7 percent. Meanwhile, he believes the college is likely to raise tuition by 3.5 to 4 percent.

Most colleges need the money students pay in tuition to pay professors, buy books for the library, and fund general operating costs. If such colleges take in too many students who pay little tuition, they don't have enough money to pay the college bills. Colleges typically try to balance the number of students to whom they provide discounts (or scholarships) with enough full-paying students. Typically, all but the most elite colleges (which usually simply promise to meet the financial needs of all students, since every student they admit is top-notch) tend to offer bigger scholarships to students whom the colleges find more attractive.

But the economy looked so dour early this year that many colleges provided extra-big scholarships to lots of applicants, just to make sure they had enough students.

Indeed, dozens of private colleges have reported that more generous aid offers resulted in unusually large or even record freshman classes this year: DePauw University in Indiana, Goshen College in Indiana, Roanoke College in Virginia, and Maryland Institute College of Art, to name just a few.

A recent analysis by Moody's found that 30 percent of private colleges will take in less in total tuition dollars this year than last year. That decline comes in spite of an average 4.4 percent increase in the asking price for private colleges' tuition. The average $1,100 increase brought the tuition sticker price at a typical private college to just over $26,000 for the 2009-10 school year. That means that while some students are paying the higher prices this year, more students got much bigger scholarships from their schools this year than in previous years.

That revenue-sinking strategy can't last for long. Colleges' costs are going up, just like everybody else's, notes Ursinus's Strassburger.

The 30 percent of colleges that handed out so much aid that their revenues declined this year will be under extra pressure to raise tuition and rein in aid in 2010. And high school seniors who don't have the grades, test scores, or special talents to make themselves attractive to a college are likely to see much smaller awards this year than they would have last year.

• Searching for a college? Get our complete rankings of America's Best Colleges.

Corrected on 12/09/09: A previous version of this article included an incorrect title for John Strassburger. He is chair of the Board of Directors of the Council of Independent Colleges.