EAB Experts Brett Schraeder and Sarah Le Duc provide insight into how financial aid optimization (FAO) works and how universities leverage FAO strategy to balance institutional goals. The two separate fact from fiction and explain how schools use FAO to optimize revenue from wealthier families so they can afford to be more generous in awarding financial aid to students from historically underserved populations.
Finally, Brett and Sarah share advice for the 99% of institutions that depend on FAO to diversify their incoming class, improve student retention, and generate enough revenue to fulfill their mission.
Financial Aid Optimization or FAO, is one of the strongest levers that schools have at their disposal to really attract a mix of students from different backgrounds. - Sarah Le Duc, EAB
0:00:12.1 Speaker 1: Hello and welcome to Office Hours with EAB. Today, we explore a subject that is not well understood by almost anyone who works outside in enrollment office, the subject is financial aid optimization or FAO for short. FAO is one of the strongest levers schools have at their disposal to enroll and retain a mix of students from different backgrounds, while ensuring they generate enough tuition revenue from students who have a greater ability to pay, striking that balance requires sophisticated analysis and modeling capabilities. You'll hear today from two experts in the field who will explain how it works and separate a few myths from reality, give them a listen and enjoy.
0:01:02.0 Sarah Le Duc: Hello everyone, welcome to Office Hours with EAB. My name is Sarah Le Duc, and I'm joined today by my colleague, Brett Schraeder. Hi Brett.
0:01:11.6 Brett Schraeder: Hi there.
0:01:15.1 SD: So today we're going to talk about a subject that Brett and I know quite well, but it is not known quite well from folks outside of those who work in the enrollment office, and that is financial aid optimization. So before we get into the details, I think what we'll start with is just a little bit of an intro of the topics that we plan to cover today, so we're going to discuss the approaches that folks take in financial aid optimization work, the benefits to working with a partner and effective financial aid optimization. And then lastly, just going through some advice, some takeaways in terms of using financial aid to diversify your income in class, boost yield, meet net tuition revenue targets, all those things that are important in terms of the longevity and sustainability of campus environments. So basically, what financial aid optimization is, is a tool that folks use to determine net tuition revenue goals and help them to discuss enrollment goals as well as other institutional priorities that are individual to each separate campus. Brett, Did you want to take it from here and walk through some of the approaches to financial aid work?
0:02:50.1 BS: Yeah, sure. I think it's an appropriate kind of topic, I guess it's always an appropriate topic. Right, Sarah, how do you do financial aid? But appropriate topic right now because students are busily applying or have already applied, and parents and students are applying for financial aid right now, and so it's certainly on people's minds, and just paying for college in general is always on people's minds, so we know it's an important topic, I think, as you've stayed at the top, what most people don't know is that in the background, each institution is sort of trying to figure out what's the best way to deploy their financial aid dollars in the most effective way that meets their goals. Schools don't have unlimited budgets in this, and so they have to really find ways to figure out what's the best way to do this, and so it's good context for us to be talking about it, and so there's a couple of typical approaches that are used, all of this is in the world we live in today, it's probably not a surprise to hear that a lot of this is data-driven, that we're using some data modeling techniques and some ways to really think about how students are making their decision, how students and families really are making their decision to attend to college.
0:04:19.7 BS: So we kind of think about it in that way. And so one of the things we do at EAB and what this world of this thing called Financial Aid optimization is, is really trying to understand the role that financial aid plays in a student's decision to attend, and we know it is an important part of the decision, it is not the only part of the decision, there's many other things that go into a student's decision to attend a particular institution, but financial aid is certainly a big part of it, and as cost have risen, probably an increasingly important part of it. So let me talk about the two general approaches, there's sort of what we might call the human guided with sophisticated modeling of approach that doesn't really roll off the tongue, but that approach is what we do at EAB. So, we take all of the data that we have, and we really try to, again, understand what are students... What are reasons that they enroll and What role financial aid plays in that? The reason we call it human-guided is because we use a bunch of sophisticated modeling techniques in the background, but you have ongoing consultation with people like Sarah and me and our colleagues who have actually spent time on campuses who understand that this comes around a question about mission and the way that the college or university wants to.
0:05:50.4 BS: What kind of class they wanna have, and so it's sort of that guided thing where we say, Look, the model might tell us certain things, but we also wanna always check those things with the institution and make sure that they're meeting the goals that institution has, and also we wanna always make sure that there aren't things underneath that are happening that the institution doesn't want, that they see certain enrollments dropping with a certain approach or strategy, or they see their gender balance may be getting a little bit out of whack or something like that, and so that guided approach is really, you need someone sort of on the side who really helps the institution understand what's going on with this modeling and the sophistication. Do you wanna talk about... Yeah, go ahead Sarah.
0:06:40.7 SD: I just was thinking that's such a good point, Brett, in terms of the pieces of the equation that we would notice because we're monitoring it, and I just wanna double down on that and how strong our analytics teams are in terms of the experiences they've had, and really just pointing out that really it's the best tool that institutions can use, they're not only getting the strong data and analytics, but they're also getting the guidance of an observed model as our status station would say, or a human-guided model, along with the machine learning.
0:07:23.6 BS: Yeah, that's a great point, I think, and that actually is a good segue to the other approach to this, which is what you might call almost like a complete machine learning approach where to use the off to use "the set it and forget it model", and it's not really that, but really that just the model tells us to do X, and so we will do X without really spending a lot of time thinking about what that impact is, or just maybe not even understanding that it's gonna have an impact, and so that's not an approach that we really use here at EAB, we use some of the techniques, but again, that human-guided, Sarah, you have said it really well, just doubling down on that, and so the more we've gotten sophisticated with modeling, there's been maybe more of a tendency to move to that like, well, we get just a little bit better if we do this, this machine learning only approach, and that can have some consequences that we end up looking at, at the end and going, this didn't really work in the way we intended it to, and so that's kind of why we really use those modeling techniques, but use that guidance along the way as well. So those are the two big things. Sarah, what do you think in terms of why does a school hire us? What's the reason behind that?
0:08:49.5 SD: Yeah, it can be a multitude of reasons. When we first began a relationship with a college or university, usually what they tell us is they're trying to grow enrollment or they're trying to improve their net tuition revenue, so have a financial aid strategy that's more efficient. So typically, those are the goals from the outset, but then as you learn more about each other and they learn more about what we can provide, and we learn more about what their challenges are, either institutionally or with their data sets, we begin to understand more and be able to refine our relationships with those partners in a way that can create additional outcomes, but essentially what we're looking for is a way to help them to be efficient with the financial aid dollars that they have, and then in addition to that, find ways where they can kind of maximize the amount that they're able to spend in order to drive optimal enrollment outcomes, and remember, financial aid optimization or FAO is one of the strongest levers that schools have at their disposal to really attract a mix of students from different backgrounds while also ensuring they get enough students who are able to cover at least close to the full amount of the cost or all of the cost.
0:10:26.2 BS: Yeah, I think that's an excellent point Sarah. Just really underscoring the fact that the starting point for these institutions, they definitely have to have enrollment and revenue to operate, that's absolutely true. But colleges and universities have a set of students that they serve, and I think the general question and the general conversation we almost always have on campuses is, how can we be better at supporting the students that we have? And so we're often really, I think thinking about that, and you know it's interesting, sometimes I think it kind of addresses some misconceptions, I know one misconception I've seen is campuses will say, Well, it costs a lot of money to support our high need students, and oftentimes we work with them, and I know you've had some examples of this where we really look, dig into their data and we realize, Look, you're already supporting them well, and you could probably support them better even if you expanded your aid and you could support your net tuition revenue and enrollment goals too, so it's sort of everybody wins a scenario, and I know, Sarah, you've been involved in helping some schools move to these promise programs where the school, along with federal government and other support is able to help students cover the entire cost of tuition. Do you have any sort of comments or thoughts?
0:11:53.3 SD: Yeah, so, Brett as you know, I spent the majority of my career working in financial aid office. So really, the biggest challenge for students sometimes is just understanding how much it's actually going to cost them, so at public institutions in particular, that have a higher tuition or have a lower tuition rate, and possibly have a high number of pilgrim recipients, or they have a really strong state grant program, like the state that I live in, Minnesota, has a really strong, or the state you live in, Brett, California, both really good state grant programs. So oftentimes, it actually ends up being free or close to free for Pell eligible students when you couple together on merit scholarship, a Pell grant, a state grant, and usually it doesn't take a huge incentive or a huge expense from the institution to help cover a free tuition type program, and even if an institution maybe doesn't bite on it initially or needs another year or so to be able to go through with the policy, it has the benefit of having a marketing splash 'cause you can save free tuition, which nothing's clearer than that, right?
0:13:20.4 SD: It doesn't cost anything, and then it also provides, if it does have an expense associated with it, it provides the enrollment team with a really great presentation to bring to the board or the Cabinet of their institution to be able to say, Listen, it's actually not going to cost us that much more because we're already pretty close to doing that anyway, when it's all in for all types of aid. So that's been a really exciting benefit for me, 'cause I certainly believe in equity and providing opportunities to diverse groups of students and communicating it in a way that we haven't been so strong at in the past, and then I was wondering from you, Brett, when you're working with our statistical model, if you've ever been in a situation where the model says, you know what? You're actually giving these students too much money, you know, the optimum amount of money that we should actually be giving these students is less than what we're giving them right now.
0:14:28.8 BS: Sarah. Yeah, that's a great question. What if the models tell you maybe you're giving too much money, and the models tell us a lot of things, that's why the humans are there to help the institution understand what the model is telling them, but often when we see this, it's sometimes because the university is given too much money. Maybe the students who aren't, don't need it, there may be a little more affluent, and so we might suggest lowering those merit awards in service of giving more money to high need students, the previous example we were just talking about. I think the reason you do this, a modeling process is it's not always a one-to-one correspondence, so just taking a dollar away from a student's Merit Award doesn't mean you automatically have that dollar to spend on another student. So what we're always helping the institution to understand is, if you're gonna take away dollars, how much does that free up for other students? And where is the point at which that doesn't end up working? It actually hurts on all fronts, you can't serve high need students as well, you can't serve a middle-income students as well, you can't serve a high income students as well, and there's always a balancing act there, and that's really part of our job is to help them understand the balancing act.
0:15:52.2 BS: But I would tell you also, like you said, we both spend lots of time on campuses, we all do this work really to understand how we serve students, and I would say that's almost always the most common question is, “How is this impacting our students, how are they doing better or are they not doing better?” And then thinking about what does that mean for our ultimate strategy? And that's actually a question. Maybe for you, Sarah, sometimes folks will say, “Well, this is just really to get students in the door, but it doesn't really think about how do students retain and graduate,” so how do you approach that question?
0:16:40.8 SD: Yeah, that's a great question and one we are getting asked more frequently, which is a good thing, and I think it ties to what you were talking about previously, because sometimes a cabinet or board at an institution might say, we need to bring the discount rate down. But what does that actually mean? So that's sometimes what we're talking with, or what we're arming our vice presidents of enrollment with. If you do that, if the ultimate goal is actually to drive discount rate down, how does that impact students? So I think, again, thinking about not only enrollment, but retention, bringing all the data that the institution has together, we do retention analysis with schools as well, which is always really helpful, really informative to say, Okay, you grew your enrollment this year, but then to fight some of those kind of the gossip, maybe that's happening on campus. It's like we brought in a large class, but guess what? None of them retained, meanwhile, it could be that you actually did retain fewer students, but maybe as a percentage it's larger or just having that data backdrop to fight some of the things that folks are seeing on campus.
0:18:03.7 SD: And oftentimes what we find too, is that there is a pretty strong correlation between the amount of aid that a student is awarded and the likelihood to retain, ultimately, those two are pretty closely tied together, and when we do are able to improve the financial aid awards, especially for students who are less likely to retain from other variables that are associated with those students, ultimately you're decreasing the percentage of chance that aid is the reason why that student doesn't retain, that doesn't mean that you're wiping it out or it will never happen, but at least you're limiting the impact of cost being the reason why they can't continue enrollment.
0:18:55.5 BS: Yeah, I think that's an excellent point there, retention is such an important piece for us, and that's I think one of the things I've seen when we've worked with schools and really thinking about what does this look like over four years or five years as students retain and graduate is, the conversation can be, you know, you have strategy A and strategy B. Strategy A and strategy B look pretty similar when the students walk in the door, but over four years, maybe strategy A looks a little bit better, and so we'll go toward that one, and that's a good, as you said Sarah, data-backed solution for institutions to say, Here's why we're going with this strategy, because not only does it do what we needed to do to bring in the students that we want and that fit our mission and that hit our net tuition revenue goals, and hit our enrollment goals, but it also is the better strategy going over four years. So those are always good questions that I wanna ask and our partners push us on that, and we push our partners on that too, again, sort of that way of understanding what does this strategy actually do? Who is it impacting? And what does it look like over time? So Sarah, at the end of all this, what's your perspective on like where are schools going with this? Again, what's sort of ahead and why are schools really, at the end of the day, kinda involved in this financial aid world, financial aid optimization world?
0:20:38.2 SD: Yeah, it's a good question. They have a variety of enrollment goals, the data that we are looking at is in helping to inform the strategic decisions that they're looking to make on campus, so it's certainly it's about financial aid optimization, but what they are optimizing, I think differs from institution and institution, and certainly changed over time. I think when we began this work, there was a lot of work in terms of net tuition revenue optimization and what does that mean? Where are we missing out? And where are opportunities? And I think it's evolved a little bit to be a bit more nuanced than that than it used to be, or kind of historically was, in a way that says, our local market is a Hispanic population that is a high need commuter population, we really wanna grow our work with our community and be more tied to our community, how can we do that, right? So that's not necessarily traditional financial aid optimization, but it is an enrollment goal that we love to help with. That's the nuanced goals, the ways to get creative about the award institutional budgets that you have, and then just finding ways to, again, helping the enrollment team communicate what's going on nationally and how it impacts the modeling and all of the outcomes that we project.
0:22:23.3 BS: Yeah, I think that's a great, great point. I was kind of thinking, you know, one of the things that I think has changed a little bit over time is financial aid, because it's a big number on a lot of campuses, I think increasingly folks are thinking of is, it's an investment, so it's an investment in our students, and what's the best way to get the most out of that investment? And if you look at it that way, I think it serves everybody pretty well, don't you think?
0:22:55.6 SD: Yeah, I think that's a great way to think of it. That's how you and I probably think about it too. I wonder, just kind of moving on to our last section here too, what are the best pieces of advice for schools if they're considering like, “Hey, maybe we should look at financial aid Optimization, we've always done an in-house before or we used a different vendor a few years ago and it didn't work out that well.” What would be the best kind of advice or helpful tips in terms of that?
0:23:32.5 BS: Yeah, that's a great question, I think, yeah, certainly the world of data analysis and data crunching numbers, it's become such an important piece of all of everyone's strategy. It's in higher ed. It's in corporate America, it's everywhere. We can sometimes get the question, Should we do this in-house or can we do this in-house? And I think at EAB, we're lucky in that not only do we have a financial aid optimization division with data scientists and data analysts, and folks like Sarah and I that have spent a lot of time on campuses, we also have a huge research arm that we bring some of those learnings to there, so how does financial aid help retention in small pockets and those kinds of things and other questions that we get asked? So I think one of the things that we really want schools to understand is, if you go it alone, you need to build an infrastructure that is pretty significant to do it well, and so that's often why schools come to us because we're a little bit more of an economical option and an option that probably gives them more than they could get going at alone.
0:24:49.2 BS: So it has to be sort of a year-round endeavor, it's always helpful to get help crunching the data, and then really just that investment strategy, some of these colleges that have... Not every college has a big endowment, but schools with even moderate endowments get help to invest their endowment dollars. This is sort of similar to that, you're getting help to invest your financial aid dollars, and while you might know a lot about it, it's always good to have some outside advice. So I think as we wrap it up, I think the important point I think we sort of made it is, to make sure that schools are spending their dollars in the most effectively possible to meet their goals, and so that can mean that making sure that they're not giving too much money to, say, higher income students in service of giving more money to high need students, figuring out that balancing point, and really, at the end of the day, most schools in the country admit most of their students, most schools in the country don't have big endowments, and so they need tuition revenue to keep going. And I think, my feeling on this, and I felt like this in 27 years of being in higher ed, this country is a better place for having institutions that serve the students that they do.
0:26:19.5 BS: We have this awesomely diverse set of college and universities around the country, we are a better place for having that diverse set of colleges and universities, and so getting help with financial aid optimization means that those universities and colleges can continue to support the students that they serve, and I think that's why we're in this, and that's why we do this, and that's what's important to me. So I'll leave it there, Sarah, and some last comments before we wrap up.
0:26:49.6 SD: Well, I can't think of any better way to end it than that. So thanks for joining us at office hours with EAB. My name is Sarah Le Duc. Joined by Brett Schraeder today. So thanks so much.
0:27:09.6 Speaker 1: Thank you for listening. Please join us next week when we look at student activism on college campuses and share tips on ways for university leaders to engage in more constructive ways with students who are calling for change. We'll also discuss how to approach difficult conversations with major donors when they disagree with the cause or action students are demanding from your school. Until then, thank you for your time.
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Visit our podcast homepage for additional episodes, information on our expert contributors, and more.