Hand It Over III

Dean Chin

Read Part I: "Hand It Over: Colleges Take Outside Scholarships for Granted"

Read Part II: "Hand It Over II: Colleges Collect on Students' Summer Jobs"

Stanford Magazine, the University’s alumni publication, recently published an article entitled “Farm Aid.” The article, an interview with the dean of admission and financial aid Richard Shaw and Provost John Etchemendy, aimed to illuminate Stanford University's new financial aid policy and more generally the issue of affordability in higher education. The interview was conducted shortly after Stanford announced broad “enhancements” to its financial aid program.

Under Stanford’s new financial aid plan:

parents with incomes below $100,000 will no longer be required to pay tuition. In most cases, their parental contribution will not exceed the costs of room and board along with other expenses (about $11,000 for the current academic year). Parents with incomes below $60,000 will not be required to pay any costs, including room and board, books and travel expenses. Students in all income categories will be expected to pay up to $4,500 from their own pockets through some combination of savings, summer earnings (estimated to be about $2,000) and work-study jobs while at Stanford.

Read that last sentence carefully. Students in all income categories from Stanford will be expected to pay up to $4,500 from their own pockets through some combination of savings, summer earnings (estimated to be about $2,000) and work-study jobs while at Stanford. This includes students that do not need financial aid from Stanford.

It is worth noting that books, supplies, personal expenses, and various transportation costs are not part of the Stanford’s university bill. This increases the total cost of a Stanford education for the 2008 academic year by an estimated $4000. In most cases for parents who earn below $100,000 but above $60,000, the minimum cost to attend Stanford for the academic 2008 year would be about $20,000. 

Stanford’s explanation of its financial aid plan deserves some scrutiny. I include excerpts from the “Farm Aid” article followed by commentary of my own: an exercise in what bloggers call “fisking.”  

Stanford Magazine: This was the third year in a row Stanford has expanded its financial aid program. What is driving the changes?

Shaw: It is part of a continuum. We reassess our program every February to see whether we are doing all we can. Our goal is to get to a place where students aren't encumbered by large debt loads in order to study here. If you have the capacity to do that, you should do it. 

Etchemendy: We have been enhancing our financial aid for several years. For nearly 90 percent of all U.S. families, it is now less expensive to attend Stanford than to attend the University of California schools. That was true for about 70 percent of all families prior to this new program. That doesn't mean the cost doesn't pinch families in the middle class, however. We have tried to address that. 

Chin: To have nearly 90 percent of all U.S. families who have a child who attends an institution like Stanford at a lower cost than attending an institution within the California State School system is a well-intended goal.

Stanford Magazine: How much will it cost, and where did the money come from?

Shaw: More than $20 million just for this new program. Our total financial aid commitment for under-graduates is about $114 million.

Etchemendy: The cost is not coming out of the endowment, at least initially. It can't because we're already spending all of the financial aid money the endowment is currently producing. About half of it will be paid through an increased allocation to financial aid from the Stanford Fund. The other half initially will be paid out of other reserves that we have. Our goal is to raise additional endowment so we can pay for it in perpetuity out of the endowment.

Chin: Mr. Etchemendy’s answer is confusing. Stanford is not going to spend down its endowment to support these new commitments, but it is going to spend other funds that might normally be classified as “functioning as endowment,” without the specific legal entailments of endowment per se. To make sense of this, the reader would need to know the total picture. He gives the impression that support of the program will come from Stanford’s own money in the form of the Stanford Fund and “other reserves.”

But this is misleading. As my previous analysis proves, those “other reserves” are actually external funds—such as outside scholarships, parents’ tuition benefits from employers, and state/federal grants. Using the chart below, I will demonstrate how those cash reserves are created at Stanford. 


  Case 1 Case 2 Case 3 Case 4
Outside Scholarships 0 2,500 4,500 6,500
Academic Year Earnings – Self Help 2,500 0 0 0
Summer Earnings – Self Help 2,000 2,000 0 0
Stanford Scholarship 30,000 30,000 30,000 30,000
Federal/State Grants 6,000 6,000 6,000 6,000
Remaining Costs (Room & Board,
Books, Transportation, etc.)
16,000 16,000 16,000 16,000

In the first case, the Stanford student did not receive any outside scholarships, thus has to work throughout the entire year to meet the earning expectations of $4,500 to meet the requirement for the $30,000 Stanford Tuition Scholarship. If the student holds a job on campus for the full year, the source of funds that pays for the student’s employment comes out of Stanford’s operating budget.

Before moving on to the other cases, we have to remember Stanford’s policy on outside funds. No matter the source, Stanford deducts academic year and summer earnings expectations from those outside funding sources first. 

In the second case, the student earns a $2,500 outside scholarship from a charitable foundation. As a result, the student does not have to work for the academic school year. Consequently, that leaves a vacant position which will be filled by another student that did not earn an outside scholarship. This case benefits Stanford because the institution can use the $2,500 outside scholarship to subsidize an unfilled campus position, giving the internal operating budget an excess of $2,500. Through the outside scholarship, therefore, Stanford creates a cash reserve of $2,500.

In the third case, the $4,500 outside scholarship deduction is applied to the summer earning expectation (in addition to the academic year earning expectation), and the student is released from his summer work-study requirement. This benefits Stanford as well because this increases the unused cash in the operating budget by $2,000 bringing it up to $4,500.

In the fourth case, the student earns $6,500. The remaining excess $2,000 in outside scholarships is used to reduce the Stanford Tuition Scholarship by that amount dollar for dollar. This creates a second cash reserve within the Stanford’s financial aid budget. As mentioned in previous parts I and II, this is the best case for Stanford. The university not only gets a full calendar year of subsidized labor for one campus position, but also gets to reduce its own scholarship since none of that excess $2,000 can be used by the student to cover the $16,000 owed in other expenses.

 In essence, these two cash reserves were inappropriately created and sustained by charitable foundations and individual philanthropists.

According to Stanford’s Financial Aid Office, any money granted from a parent employer’s tuition benefit program is treated like an outside scholarship. Tuition benefits go first to reduce the students’ yearly earning expectation. If the corporate grant exceeds the yearly earning expectation requirement, it will reduce any Stanford Fund scholarship dollar for dollar. 

For example, let’s take that family whose total income is less than $100,000 but greater that $60,000, yet has $8,000 in the parent’s employer’s tuition benefit program. Under Stanford’s financial aid rules, that family’s tuition is fully covered. Like an outside scholarship, Stanford will allocate $4,500 to cover the yearly earnings expectations and then take the excess $3,500 to create a third cash reserve. Therefore, this third cash reserve is created by corporate funds. Unfortunately, none of that $3,500 can be chosen to cover any of the remaining $16,000 in other college expenses since it is restricted to only tuition by company policy.

Here is Stanford’s policy regarding state and federal grants. This excerpt is taken from Stanford’s 2008-2009 Financial Aid Handbook:

You are expected to apply for all funds for which you may be eligible. If you are eligible for government grants but fail to apply for or accept such funds, we are not obligated to cover the resulting shortfall with institutional funds.  By filing the Free Application for Federal Student Aid (FAFSA), you are automatically considered for the federal grants.

Stanford requires that its students get as much government funding as possible or suffer the consequences if they fail to do so. Interestingly enough, Stanford, under 501 (c) (3) of the Internal Revenue Code, is already being subsidized by taxpayers.  As a nonprofit educational institution, Stanford does not have to pay any taxes. This policy is really all about getting more.

The policy goes on to state: “Federal grants, Cal grants and other state grants are considered to be direct resources meeting your financial need.  These grants do not reduce the self-help expectation in your aid award or your family contribution.” 

Financially speaking for families who qualify for such assistance, this helps Stanford lower their internal scholarship aid dollar for dollar, since that money cannot be used to reduce self-help (work-study) and the expected family contribution. Stanford is allowed to dig deeper into taxpayer funds further when a student also qualifies for a federal work-study grant, in which the federal government subsidizes Stanford’s student labor force. This fourth cash reserve is built by taxpayer funds.

In summary, all four cash reserves were created by outside money from various sources and pooled together to cover some of the cost of Stanford’s new financial aid program.

Stanford Magazine: The University has an endowment of more than $18 billion. Can't it simply designate more of that money for financial aid?

Etchemendy: The endowment consists of many, many past gifts donated to the University. Most of them have a specified purpose. If an individual provides an endowment gift to support cancer research, it would be illegal for us to use that for financial aid. If a gift is made to support an endowed professorship, it would be illegal to use that for financial aid. About 30 percent of the endowment payout is used for either graduate or undergraduate financial aid. The rest is used for endowed professorships, program support and so forth. If you actually look at the cost of providing an undergraduate education, it's about $60,000. Tuition is about $35,000. So in some sense every student—even if they are paying the full $35,000—is receiving financial aid. What covers the difference? The endowment.

Chin: Mr. Etchemendy is correct when he says most university gifts have a specific purpose but that in itself is only a partial truth. According to Stanford's 2007 Annual Report, 24.4% of Stanford’s total endowment is allocated as unrestricted funds. That means Stanford University has roughly $4.4 BILLION in unrestricted funds, more than enough to pay for the $20 million financial aid increase. Comparatively speaking, that $20 million is just .45% percent of that unrestricted cash. In terms of the $10 million reserves created by outside funds; that is just .23%. Does Stanford really need to pool outside sources of cash together to help pay for the costs of the new financial aid program? That answer is clearly no.

Also the claim that the actual cost of undergraduate education is $60,000 when tuition is about $35,000 is misleading, although it is a familiar formulation used by many colleges and universities to justify sky-high tuitions. The “actual cost of undergraduate education” in cases like this is derived, more or less, by dividing the operating budget by the number of students. That assigns as a “cost of undergraduate education” a vast array of expenses that contribute little or nothing to the quality of a Stanford education. 

Stanford Magazine: How many students will benefit?

Shaw: About three-quarters of undergraduates receive some form of financial aid. This includes those who get outside scholarships and athletic aid. Last year, 42 percent received need-based scholarships from Stanford, and this is the population that will benefit from our enhancements. On average, we think the savings will be 16 percent for students in this group.

Chin: By Shaw’s figures, about 25% percent of the undergrad students that attended Stanford last year did not receive any financial aid. Of the 42 percent that did receive need-based scholarship aid from Stanford, if those students received outside aid of more than $4,500, none of those excess funds could be used to help reduce other expenses such as room and board, books, and other personal expenses. Instead, that excess money reduced the Stanford Scholarship dollar for dollar as stated in Stanford’s Financial Aid Handbook. More importantly, a majority of students, 58%, did not receive need-based scholarships from Stanford. Shaw does not mention if the new financial aid program helps some of these students.

Stanford Magazine: In some accounts describing financial aid programs, the practice of reducing tuition is referred to as a “discount.” Is that an accurate characterization?

Etchemendy: Calling it a discount is misleading because when we calculate a student's financial aid we look at the student's entire budget—the cost of tuition, the cost of housing, the cost of food, the cost of books, airfare to and from Stanford—and then we make sure we can cover those costs. In the case of students who need the most financial aid, we're providing them with far more money than tuition. It would be like saying I get a discount when I buy this car, but not only are they giving me the car, they're giving me enough money to buy gas, to stop at McDonald's for lunch on the way home, and so on.

Chin: I completely agree with Mr. Etchemendy. To clarify his point, a discount is a reduction of the overall price of a good or service. Financial aid programs, both internal or external of any university, are really gifts to help cover the cost for college. All financial aid providers—whether they are charitable foundations, government programs, for-profit corporations, or universities—have the right to choose the amount of gift they wish to give and to whom they wish to give it. Some providers even have the right to tell the recipient of the gift how the money has to be spent or even have stipulations to gain those funds such as maintaining a minimum Grade Point Average.

Stanford Magazine: Stanford still requires students to pay a portion of their expenses themselves. What was the rationale behind that?

Shaw: We believe you ought to contribute to your education. There are two ways to do that—either you work or you take a personal loan. A lot of students will choose to work to make up that difference. Our students' average debt load last year was $10,000. That seems like a very reasonable amount for four years at Stanford. If students work and make the contribution toward their self-help over the next four years, they can leave without taking any loans.

Etchemendy: I worry about creating the perception that an education at Stanford is an entitlement. That's one of the reasons we believe students should contribute to the cost. What we are trying to do is make sure every student can afford to come. That's different than saying, “Here, your education is free.” That worries me.

Chin: To be clear, the $10,000 Shaw must be referring to is only the work-study loan, not the loan to cover the remaining total cost of attendance. This happens when a student decides to work for some allotted time while placing the rest of the work-study money owed into a loan.

Mr. Etchemendy is unequivocally claiming that the main stipulation for those receiving and maintaining a Stanford scholarship is a work quota equal to about $4,500 per year. Certainly, $4,500 worth of work-study to receive a much larger Stanford Scholarship is a great deal for the students and their families.

It is perfectly understandable and reasonable that Stanford wants its students to contribute to their education in some way to prevent the perception of entitlement towards the Stanford Scholarship. Placing a work quota as the main criteria to receive any funds from the university scholarship fund is certainly within Stanford’s right.

However, here is where Stanford goes completely wrong. In terms of social institutional functionality, neither Stanford, nor any other university, has any right to take outside scholarship funds given to a specific student by a separate charitable organization and use those funds to cover the university’s work-study stipulation for its own scholarship. To claim such jurisdiction is directly interfering in the operations of another business and that charity’s relationship with the student recipient.

Consequently, Stanford never had the right or jurisdiction to take away any “excess” outside scholarship money either, especially when the student’s total cost to attend has not been fully covered. The “excess” money argument is completely fabricated by Stanford to justify taking and redistributing outside scholarship as Stanford sees fit. When an outside charity gives an outside scholarship to a student, it meant to help that specific student and only that student. For Stanford to redistribute that money to another student is directly intervening in the charitable relationships of another nonprofit.

Stanford will attempt to rationalize its behavior toward outside scholarships and their recipients by stating how it handles such external funds still provides the student the benefit of free time. But students, their families, and the outside scholarship providers should be the ones who get to decide where to allocate award money, not the university.

Stanford has found a clever way to profitfrom money intended to benefit students. Its new financial aid system was built for two purposes: A) to appear to be more generous and B) to preserve the endowment at the same time. In that regard, Stanford succeeds. The University safely preserves a precious .23% of its unrestricted endowment fund.

Again, Stanford will say that its financial aid definitions of “need” and “self help” allow them to do this. I say, in most cases, Stanford’s definitions of need—which exclude total cost of attendance, and self-help, and which exclude total family contribution—are monopolistically self-serving attempts to place controls over other charitable organizations and their funds.


Stanford's 2007 Annual Report

Stanford University’s 2008-2009 Financial Aid Handbook




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