Economics 101: Colleges and Current Economic Realities Sandy Baum March 2009

The Economy and Higher Education Recession Credit crunch Background on prices and aid Basic economic concepts

Why Economics? Understanding the context of student aid Analytical approach to prices and student aid Supply, demand, incentives Equity, efficiency

Changing Policies The stimulus package More Pell funding Institutional funding The Obama budget Pell Student Loans Tax Credits Simplification?

The Credit Crunch Availability of student loans Parent financing options Institutional financing options

Supply Affordability / access conversation has to combine supply and demand. Relationship between price and quantity Holding constant costs of production As price increases, quantity supplied increases Supply is more price-sensitive in the long-run.

Where is your institution or system on the supply curve?

Examples of Supply Shifters Higher input prices Technical change Lower government appropriations (publics) Lower endowment (privates)

Demand and College Affordability Demand shifts out when incomes increase when preferences change when the value of higher education changes

How price sensitive is your applicant pool?

Family Circumstances Income Savings Uncertainty

Percentage Growth in Mean Family Income by Quintile (in Constant 2007 Dollars), 1977–1987, 1987–1997, and 1997–2007 Source: U.S. Census Bureau, Current Population Survey, Table F-1, Table F-3, and FINC-01; calculations by the authors, where available.

How price sensitive is your applicant pool?

Labor Market Changes and Demand for College Reduced ability to pay Reduced opportunity cost of student time

Marginal Costs and Benefits Marginal vs. total Diamonds and water Do we need more technology? Marginal vs. average Should we enroll additional students?

Institutional Aid Institutional aid is a form of price discrimination Price discrimination may increase number of students enrolled at individual school Impact on total revenue Need-based aid discriminates based on ability to pay Other forms of aid discriminate on willingness to pay

Tuition Price Quantity Financial Aid: Price Discrimination D students on aid full price full-pay students total students

Need-based vs. Non-need-based Aid Price sensitivity Horizontal and vertical equity Short-term vs. long-term Foundations for need analysis: income, assets, snapshot view

Finding Solutions Short-term measures Long-term strategies

Sandy Baum A Primer on Economics for Financial Aid Professionals red/fa/Economics-Primer-2004.pdf