American University Student Government Commission on University Budget Policy

RECOMMENDATIONS FOR THE UNIVERSITY BUDGET FOR FISCAL YEARS 2014 AND 2015
November 12, 2012

Report from the Student Government Commission on University Budget Policy Letter from the Commission To the American University Community: It is with great pleasure that we announce the enclosed report from the Student Governments Commission on University Budget Policy. This report offers our reflections and recommendations regarding fiscal years 2014 and 2015 to President Kerwin, the University Budget Committee, and the Board of Trustees. This budget cycle has renewed student interest and concern in the University budget, especially with regard to tuition increases and financial aid, and rightfully so; students contribute 82% of the Universitys revenues through tuition. Undergraduates are concerned with the rising costs of attending American University, especially those taking out private loans. We echo long-term concerns about student debt and how it will impact students for years to come. Student debt has risen to the forefront of many discussions about education policy nationwideand it is an issue that deserves focus in our university budget process. At their core, budget decisions force us to balance our present interests with our future investments. American University has historically struck a balance that enables current students to succeed while remaining dedicated to a strategic plan that will improve American University for future students and alumni. In this budget cycle, we urge the University to consider the increasing burden of tuition and the problems of student debt as they approach budget decisions. In our conversations with students, three fundamental issues have arisen: tuition increases, financial aid, and transparency. Rising tuition has increased the cost burden on students, financially straining themselves and their families. Financial aid remains of great concern to undergraduate students, particularly in light of national economic concerns and uncertainty. Transparency remains important to the student body; we believe that students deserve an honest and comprehensive explanation of any change in tuition. Fundamentally, we recommend that the University: 1. Limit any tuition increase as much as possible to only cover necessary costs. 2. Increase the tuition discount rate 1% over two years, FY2014 and 2015. 3. Increase transparency on the Universitys budget by publishing a more detailed budget. Commission on University Budget Policy American University Student Government Eric Reath, Chairman, Senator for the Class of 2013 Emily Yu, President of the Student Government Joe Ste.Marie, Comptroller of the Student Government Patrick Kelly, Senator for the Class of 2015 David Horowitz, Co-director of University Budget Policy Tionna Lake, Co-director of University Budget Policy

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Report from the Student Government Commission on University Budget Policy The Tuition Burden and Student Finances Since FY2008, tuition has increased almost 23% (see Table 1), in order to fulfill the Universitys Strategic Plan and meet Table 1. Change in tuition since FY2008. increasing personnel and utilities Fiscal Year Semester Tuition1 Change from Previous costs. The Office of the Year President has consistently pushed 2008 $15,479.00 6.0% 2009 $16,408.00 6.0% to limit increases in tuition, and 2010 $17,228.00 5.0% in recent years, has proposed a 2011 $18,090.00 5.0% lower increase than suggested by 2012 $18,777.00 3.8% the University Budget Committee. We recognize and 2013 $19,491.00 3.8% appreciate the conscientious Total Increase $4,012.00 22.95% effort taken by the University from FY 2008 administration to keep increases to FY 2013 in tuition and other costs as low as possible. These tuition increases, however, have come over the backdrop of one of the most devastating recessions in recent history, with dramatic consequences for many families incomes. The burden of tuition has increased as incomes have decreased. Since 2009, median household income has declined by 1.45%.2 In addition, this number does not reflect the widening income distribution, leaving lower-income families with even fewer funds to meet essential costs. Incomes have decreased 16% for families in the bottom 20% of the income distribution (adjusted for inflation).3 At the same time, as Figure 1 - Tuition rates compared to the Consumer Price Index (CPI) shown in Figure 1, tuition has increased at over twice the rate of inflation (measured by the Consumer Price Index). As a result, "American University Budget: Fiscal Years 2012 and 2013," (Washington, DC: American University, 2011). 2 "Economic Report of the President," (Washington, DC: Council of Economic Advisers, 2012). 3 "Trends in College Pricing," in Trends in Higher Education Series (College Board Advocacy & Policy Center, 2012), 4.
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Report from the Student Government Commission on University Budget Policy these worsening conditions have increased many families reliance on financial aid and other scholarships. A greater number of families have begun to depend on financial aid.4 Tuition increases have left income and other pricing increases behind. Table 2. Household income since 2008. Fiscal Year 2008 2009 2010 2011 Total Decrease from 2008 to 2011 Median Household Income56 $ 64,518.00 $ 62,299.00 $ 61,080.00 $ 61,395.00 -$3,123.00

A widening distribution of income, decreasing median income, and tuition increasing beyond the rate of inflation have lead many students to take out private loans. Many students do not apply for federal aid under the FAFSA leaving them ineligible for aid they could have received, but those who do often need to take out hefty private loans that will burden them for many years.

While American Universitys strong commitment to financial aid helps students to shoulder the cost of attendance, students at American University struggle with paying tuition. The Expected Family Contribution (EFC), as calculated by FAFSA data, often does not reflect the true financial situation of families. In order to meet the difference between financial aid and the full cost of attendance, many students need to secure private loans. Most of these students fall just above the Pell Grant income threshold but cannot finance their own education without private loans. There is a significant problem with elective borrowing. According to the Consumer Financial Protection Bureau, approximately 55% of students do not exhaust their federal aid potential.7 This statistic, however, belies the fact that 45% of students do apply for federal aid and exhaust their options. At American University, elective borrowing remains one of the most significant reasons that students end up taking out loans.8 American Universitys commitment to financial aid has revealed a care for its students, with 56% of students borrowing private loans, as opposed to a 65% average nationwide. It is imperative that University budget policy does not unintentionally leave behind students caught between the Pell Grant threshold and their own financial means. As the administration has often noted, these loans provide a dangerous alternative for students. The interest rates for these loans alone often hurt most students that can afford the least. Federal student loans are subject to greater protection than that of private student loans.9 American University is "Student Debt and the Class of 2011," (The Institute for College Access and Success, 2012). "Economic Report of the President," 358. 6 This data lines up incompletely with the schools fiscal years. Since AUs FY 2008 began in May 2007, weve compared it against the data from 2007. 7 "Private Student Loans," (Consumer Financial Protection Bureau, 2012). 8 "College Affordability: AU and Your Educational Goals," American University, http://www.american.edu/initiatives/collegeaffordability/taking-charge-of-your-college-costs.cfm. 9 "Student Debt and the Class of 2011."
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Report from the Student Government Commission on University Budget Policy often rated one of the most indebted student bodies: in 2011, 58% of students were in debt with an average indebtedness of $37,674. More importantly, 43% of students had student debt from private loans.10 While these figures often present a misleading image of student finances, they reveal a significant issue for students that borrow private student loans. Given these troubling statistics, the burden of tuition and composition of financial aid should play a central role in budget decisions. In response, the University has recently undertaken a significant campaign to increase financial literacy for students. This important step will enable students to better understand the choices they have for financing their education, especially involving private loans. Given the problems of student debt, increasing students financial literacy should remain a fundamental concern. Talking with students, weve found that theyre more concerned than ever before about tuition. Many have struggled to pay for school and are concerned about long-term problems with indebtedness. We urge the University Budget committee to put these concerns at the forefront of the budget cycle. Concerns about investments in the future of the University play an important role in the Universitys finances, but the University should re-double its efforts in increasing financial aid and limiting tuition increases. Funding Financial Aid The vast majority of private universities (and many public ones) uses tuition discounting to fund financial aid. In revenue-dependant universities, tuition-discounting provides the most important means of funding both merit- and need-based financial aid. In the past two decades, many private universities have substantially increased their tuition discount rates, leading to an increase in financial aid for students.11 Tuition discounting provides an effective way to fund increases in financial aid. At 29%12, American Universitys tuition discount rate remains lower than peer institutions. According to the National Association of College and University Business Officers, the average tuition discount rate is 37.2%.13 The significant difference between these two numbers reflects an opportunity to increase the tuition discount rate to become competitive with our peer institutions. Many opponents of tuition discounting argue that it disproportionately impacts low-income students. These critics assert that high-tuition, high-aid policies hurt lower-income students more. These claims, however, are based on institutions that offer more merit-based aid than need-based aid. In the last year, American University has shifted financial aid to emphasize need-based aid, with 55% of total financial aid given out in need-based aid.14 This shift ensures that low-income students are the

Ibid. Ronald G. Ehrenberg, "Independent Colleges and Universities in a Time of Transition," Journal of Economic Perspectives 26, no. 1 (2012): 4. 12 "Credit Profile: American University," (Standard & Poor's, 2011), 3-4. 13 "2011 Tuition Discounting Study Report," (National Assoation of College and University Business Officers, 2012). 14 Andy Lin, "AU reallocates amount of need-based aid in budget," The Eagle, October 25 2012.
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Report from the Student Government Commission on University Budget Policy most-eligible for need to help offset the cost of attendance. Additionally, it makes tuition-discounting a powerful weapon in fighting the increasing burden of tuition.15 Beyond financial aid, tuition discounting allows institutions to compete for the best students. In addition to enabling the University to extend educational opportunities to more low-income students, tuition discounting gives the University the ability to compete for the most qualified applicants, increasing the quality of education for all students. In addition to these benefits, tuition discounting helps students meet the increasing burden of tuition when it funds need-based financial aid. University Finance and the Strategic Plan It is important that all of our analysis regarding tuition increases and financial aid spending relate back to our goals. Looking to the report on progress on the Strategic Plan for the last two years, certain aspects of transforming goals should be highlighted. Progress on Goal 10: Win Recognition and Distinction showed that the conversion rate, or percentage of admitted students who enroll, improved slightly but did not meet the two-year target of 22%. This raises questions as to whether our financial aid spending is adequate and whether our tuition increase are reasonable to attract the numbers of admitted students we have benchmarked for. Progress on Enabling Goal 1: Diversifying Revenue has shown that fundraising and endowment growth are surpassing benchmark goals. Annual giving has significantly increased, in part due to multiple major gifts supporting academic units.16 This diversification of income gives the university more leeway to limit tuition increases and expand financial aid spending. Recommendations to the University Budget Committee and the Office of the President 1. Limit the tuition increase to cover increases in necessary costs. Tuition increases are often necessary to address increasing costs, especially servicing the debt, utilities, benefits, etc. While we recognize the potential need for a tuition increase, any increase in tuition comes at a significant cost to students, especially those borrowing private loans. This concern ought to remain central to all decisions about tuition. Given difficult economic times and an increasingly problematic distribution of income, a large tuition increase would not best serve the interests of students. 2. Increase the tuition discount rate (TDR) 1% over two years. By placing more money from tuition directly into financial aid, we can decrease the burden of tuition on those taking out private loans. More financial aid will help to ease the problem of student debt and allow the University to re-dedicate itself to helping undergraduates shoulder the burden of tuition. When tuition discounting funds need-based aid, it makes college more accessible to all students and helps to decrease the tuition burden. A tuition discount rate increase would also significantly contribute to Goal 10: Win Recognition and Distinction in shaping more competitive classes and increasing the conversion rate. A 1% increase would make American more comparable to Sandy Baum and Lucie Lapovsky, "Tuition Discounting: Not Just a Private College Practice," (College Board, 2006). 16 "Strategic Plan Update," (American University, 2012).
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Report from the Student Government Commission on University Budget Policy peer institutions, empower progress on the Strategic Plan, and, most importantly, alleviate the high cost of tuition. 3. Clearly and frankly communicate the reasons for any tuition increase to the student body. This administration has taken huge steps forward for transparency in University policy. Current efforts to educate students about the impact of private loans and financial aid will help to give students a new understanding of financing their education and making the university budget more understandable. This administration has consistently made it a priority to include students in major policy discussions and communicate decisions to the student body. Given the increased attention that this budget cycle has received, increasing communications with students about the budget will help them understand why tuition increases and where those funds will go. More transparency on personnel costs, financial aid, and more detailed unit budgets would allow students to better understand how their tuition dollars are being spent.

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Report from the Student Government Commission on University Budget Policy Works Cited "2011 Tuition Discounting Study Report." National Assoation of College and University Business Officers, 2012. "American University Budget: Fiscal Years 2012 and 2013." Washington, DC: American University, 2011. Baum, Sandy, and Lucie Lapovsky. "Tuition Discounting: Not Just a Private College Practice." College Board, 2006. "College Affordability: Au and Your Educational Goals." American University, http://www.american.edu/initiatives/collegeaffordability/taking-charge-of-your-collegecosts.cfm. "Credit Profile: American University." Standard & Poor's, 2011. "Economic Report of the President." Washington, DC: Council of Economic Advisers, 2012. Ehrenberg, Ronald G. "Independent Colleges and Universities in a Time of Transition." Journal of Economic Perspectives 26, no. 1 (January 5 2012): 193-216. Lin, Andy. "Au Reallocates Amount of Need-Based Aid in Budget." The Eagle, October 25 2012. "Private Student Loans." Consumer Financial Protection Bureau, 2012. "Strategic Plan Update." American University, 2012. "Student Debt and the Class of 2011." The Institute for College Access and Success, 2012. "Trends in College Pricing." In Trends in Higher Education Series: College Board Advocacy & Policy Center, 2012.

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