Keeping the Covenant: Ensuring that the University of
     North Carolina Remains Accessible and Affordable
A Historic Commitment
For more than two centuries, this state has invested generously in the University
of North Carolina, and the return on that investment has been nothing short of
remarkable. Today, the 16-campus University is acknowledged not just as the
oldest, but also as one of the very best public university systems in this country.
Because of generations of public commitment to excellence—culminating in
overwhelming voter approval in November 2000 of $2.5 billion in capital
improvement bonds for campus renewal and expansion—the University of North
Carolina is arguably the state’s most valuable public asset.

The University’s role in providing education, research, and public service has
grown increasingly important as North Carolina’s citizens adapt to a knowledge-
based economy. Enrollment demand is being driven not only by a tidal wave of
young “echo boomers,” but also by a growing pool of older students seeking to
update their skills to remain competitive in today’s workforce. Federal estimates
and recent experience validate UNC projections that our campuses will grow by
more than 56,000 students over the next decade.1 In Fall 2001 alone, UNC
campuses absorbed 7,000 additional students, some 1,300 more than were
anticipated or budgeted. Another 3,500 additional students are expected to
enroll in Fall 2002. Fully funding these enrolled and anticipated extra students
will require $65 million to $70 million in 2002-03.

Yet as the demand for higher education and its importance to the state’s
economic future have increased, public investment in the University has not been
able to keep pace. Even before the terrorist attacks of September 2001 sent
shockwaves through the national economy, North Carolina was in a budgetary
vise created by a combination of costly court decisions, cumulative tax cuts, and
disaster-recovery commitments linked to a succession of devastating hurricanes.
Legislative commitments to raise teacher pay to the national average and expand
the Smart Start initiative also have been put to the test.

Exponential growth in non-education demands on the state budget—fueled by
the devolution of federal entitlement programs such as Medicaid—have
contributed to recent budgetary shortfalls and have lessened the legislature’s
ability to provide adequate resources for UNC, the largest “discretionary”
component of the state budget. While the proportion of General Fund
appropriations flowing to UNC has dropped from 17.4 percent to 12.6 percent
since 1986-87, the proportion required to support Medicaid has soared from 4.2

 Source: National Center for Education Statistics, Projections of Education Statistics to 2010, November

percent to 13.8 percent during this same period. State appropriations for
Medicaid actually surpassed those for UNC in 2001-02, and this entitlement
program now faces a projected shortfall of more than $100 million for the fiscal

Like public universities across the country, the University now finds itself
squeezed between the rock of skyrocketing enrollment demand and the hard
place of a state economy that has faltered after years of relative prosperity. A
succession of mid-year budget cuts and required reversions have hampered
campus efforts to serve hundreds of unbudgeted students. In a recent survey by
the American Council on Education, North Carolina respondents expressed
concern that reduced state funding could make UNC campuses less affordable,
undermine educational quality, and place the state’s economic competitiveness
at risk.3 Given the current fiscal environment and bleak economic forecast, the
University has no recourse but to diversify its revenue streams and approaches
in order to ensure access to qualified North Carolinians, keep educational quality
high, and help revitalize the state’s flagging economy. UNC has four primary
sources of revenue to draw upon: state appropriations, private gifts, federal and
corporate grants, and tuition and fees.

                                                                                            Figure 1. Trends in UNC Sponsored Awards and General Fund Appropriations

                                                                                                                                                                                                       $673 M
                                                                                                                        140%                          General Fund
                                                                                                     % Rate of Growth

                                                                                                                                                      Sponsored Program
                                                                                                                        60%                                                                            $1,682 M

                                                                                                                        40%                      $277 M
                                                                                                                        20%                                    $1,110 M
                                                                                                                                             90           91    92   93   94 95 96      97   98   99     00
                                                                                                                                                                          Fiscal Year

    Percentage of General Fund




      12%                                                                                                                                                      UNC















    Source: NC Office of State Budget and Management Post-Legislative Summaries
 Source: American Council on Education survey on attitudes toward public higher education conducted
December 2001.

For much of its history, the guiding principle behind tuition policy for the
University has been North Carolina’s constitutional mandate that the benefits of
the University, “as far as practicable, be extended to the people of the State free
of expense.” State law further directs the UNC Board of Governors to set tuition
and required fees for UNC campuses “not inconsistent with actions of the
General Assembly.” For many years, the Board of Governors interpreted the
constitutional provision and law to mean that it should never propose tuition
increases for North Carolina residents, but that well-intended approach did not
keep tuition from rising in erratic and unpredictable fashion. It also prevented
any campus proposals for tuition changes—regardless of merit—from being
considered by the Board, which in turn prompted legislative end-runs by
frustrated campus officials.

Recognizing the need to clarify its role in the tuition-setting process to ensure
that UNC remains affordable and to help families plan their college finances, the
Board of Governors in 1998 adopted the recommendations of a Tuition Policy
Task Force. Central to the resulting policy framework were the principles that
North Carolina residents should pay as little as feasible toward the cost of their
education, and that nonresidents should pay amounts that are comparable to
those charged by peer institutions across the nation. To help ensure that cost is
not a barrier to academically qualified applicants, the Board of Governors also
sought and secured funding to implement a need-based financial aid program for
in-state UNC undergraduates.

Defining Affordable: The True Cost of UNC Attendance
As it enters its third century of service to the people of the state, the University of
North Carolina remains true to its historic promise of high quality education at an
affordable price. Low tuition—absent high quality—is a poor bargain, however.
UNC cannot remain one of the very best public universities in America without
the financial resources absolutely necessary to absorb rapid enrollment growth,
attract and retain top-notch faculty, and prepare students for the workforce of
today and tomorrow. Absent sufficient state funding to address such needs,
UNC must find viable ways—including higher tuition—to ensure that resources
are adequate to keep the value of a UNC education from eroding.

The Board of Governors is now considering University-wide and campus-initiated
tuition proposals for 2002-03, and it has asked the 16 chancellors to work
collaboratively with the President to develop a nonbinding five-year tuition plan to
inform the Board’s future policy deliberations. Whatever the outcome, the Board
and University leadership are absolutely committed to ensuring that adequate
need-based financial aid is available to offset the impact of higher tuition on
needy North Carolina students.

Low tuition alone does not ensure affordable access, since tuition is a relatively
small component of the total cost of UNC attendance. Other standard costs
include fees, living expenses, books and supplies, as well as transportation and
other miscellaneous costs. Tuition and fees combined account for less than one-
fourth of a North Carolina resident’s average cost of attending a UNC campus.
[Figure 2]

                           Figure 2. Average UNC Attendance Costs, 2001-02

                                           Books               21%
                                            7%                               Tuition
                                  Board                                       13%


                         Total Cost of Attendance: $9,777
                         (In-state rates)

In-state tuition and fees for UNC campuses remain among the lowest in the
nation. In 2001-02, the UNC average total was 34 percent below the national
average for public universities, and 23 percent below the average for universities
in the South.4 [Figure 3] Recent survey data from the American Council on
Education reveals that while North Carolinians have a better understanding of the
cost of college than citizens nationwide, they continue to significantly
overestimate the cost of a UNC education. North Carolina respondents
estimated the average annual tuition at a UNC campus to be $9,506, nearly
seven times the actual 2001-02 average of $1,366. Respondents overestimated
the average total cost of UNC attendance as $17,604, 80 percent higher than the
actual annual average of $9,777.5 As noted later in this document,
comprehensive approaches are now making North Carolina students and their
parents more aware of the actual costs of attending college and the financial aid
that can reduce those costs.

 Source: The College Board, Trends in College Pricing, November 2001.
 Source: American Council on Education survey on attitudes toward public higher education conducted
December 2001.

                  Figure 3. Average Undergraduate Tuition and Fees (in-state rates)



                   $3,000                                                                                       4-yr public
                                                                                                                4-yr public
                   $2,500                                                                                       south











Paying for the total cost of college is a shared responsibility. Students and their
families are responsible for the portion of total costs they can reasonably afford,
which is determined by using standard financial aid formulas. Financial aid
officers on each UNC campus determine the amount of need-based aid each
student will receive in a given year by using the following basic formula: Total
Cost of Attendance - Amount Family is Expected to Pay = Eligibility for Financial
Aid. [Figure 4] Financial aid officers combine grants, scholarships, loans, and
work in an aid “package” to help students meet the difference between the cost
of college and what families can afford to pay. [Figure 5]

                 Figure 4. Basic Principle of Financial Aid

                                           Cost of Attendance
                                   – Expected Family Contribution
                                   = Eligibility for Need-Based Funds

                 Figure 5. Forms of Financial Aid

                     Gift Aid
                            •   Grants and Scholarships awarded on the basis of need and/or merit that
                                do not require repayment. Sources of funds may be federal, state,
                                institutional or private organizations.
                     Self Help
                            •   Self-help aid encompasses loans and work opportunities. The sources of
                                funds differ depending on the type of aid program. Federal programs are
                                the most common loans, followed by state programs with a vocational
                                focus. Small institutional and private organizations also provide loan funds.
                            •   Subsidized Loans—need-based loan on which the interest is paid by the
                                federal government while the borrower is enrolled in school or other times
                                as noted in the promissory note.
                            •   Unsubsidized Loans—A non-need-based loan for which borrowers are
                                responsible for interest from the date the loan is disbursed.
                            •   Loans with Service Commitment—A form of aid that has a service
                                repayment obligation as a condition for receiving the funds. Usually
                                associated with vocational program, e.g., teaching or nursing.
                            •   Work—Employment opportunities provided by the institution, often through
                                the aid office. Work may be on or off-campus and some paid community
                                service work is available. Federal Work Study funding is provided by the
                                federal government with an institutional match required. Other jobs on
                                campus are funded with institutional funds.

Financial aid ensures that students from all income levels have access to a UNC
education. Students receive aid from a variety of sources: the Federal Pell
Grant program, the UNC Need-based Grant program and other state-based
programs, private foundations and civic groups, and campus-based aid
programs, as well as employment opportunities and loans. Federal aid is
leveraged to the fullest extent possible. Aid eligibility is determined on an annual
basis, and as tuition and other costs increase, students may qualify for more aid.
In 2000-01, 37 percent of UNC students received need-based financial aid. The
following cases demonstrate how financial aid assisted two students attending
UNC campuses in the 2001-02 academic year.

Family A is a single-parent household with five family members and one child
attending a UNC campus. The parent’s income was $39,035, and the student
earned $6,800 during her senior year of high school. The family is expected to
pay $2,737 toward the total cost of $11,574. The student received an aid
package totaling $8,836 [Pell grant of $1,000; state need-based grants of $2,778,
and private scholarships totaling $5,058]. Because the student received more
than $5,000 in private scholarship money that helped meet her financial need,
she was not eligible for work and subsidized student loans. This student’s family
cannot claim a tax credit or deduction for her educational expenses because her
demonstrated need was fully covered by grants and scholarships.

Family B is a two-parent household with four family members and an income of
$42,000. One child is attending a UNC campus. The family is expected to pay
$3,750 toward the total cost of $9,153. The student received an aid package
totaling $5,405 [$1,065 in state need-based grants, $1,800 in work study, and
$2,541 in a loan]. In addition, the family qualifies for the federal Hope
Scholarship Tax Credit, which enables the parents to claim a tax credit for 2001
and reduce their tax liability by $1,372.

The Hope Scholarship and Lifetime Learning Tax Credits help families with
incomes below $100,000 (joint filers) and $50,000 (single filers) reduce college
education expenses by allowing tax credits to be claimed on their federal tax
returns for qualified tuition and related expenses. In addition, new legislation
passed in the Economic Growth and Tax Relief Reconciliation Act of 2001 allows
families in higher income brackets ($130,000 maximum for joint filers; $65,000
for single filers) claim tax deductions for tuition and related expenses. Most of
the students enrolled at UNC campuses or their families are able to benefit from
one of these tax benefits.

Campus aid officials work to meet students’ financial needs while balancing the
goal of helping as many eligible students as possible attend the University. Most
aid packages combine grants, loans, and/or work opportunities in order to assist
as many people as possible.

Keeping the Covenant with The People of North Carolina
The expanded availability of financial aid has helped keep the net cost of a UNC
education within the reach of all qualified North Carolinians. In 2000-01, UNC
students received more than $169 million in grants, scholarships, and forgivable
scholarship-loans in critical areas such as teaching and nursing. Work study
programs provided another $13 million. Student and parent loans (both need-
based and voluntary) brought total financial assistance distributed for the year to
$420 million.6

Federal Pell grants are the “foundation” of student financial aid to which aid from
other sources may be added. The volume of Pell awards flowing to both in-state
and out-of-state UNC students has risen steadily over the past five years. In
2000-01, 29,550 UNC students received Pell grants averaging $2,305.7 [Figure

                        Figure 6. Average Pell Grants to UNC Students




                           $2,000                                                   Maximum
                                                                                    Federal Pell
                           $1,500                                                   UNC Average
                                                                                    Average UNC







The UNC Need-based Grant Program, first implemented by the General
Assembly in 1999, now makes $15.2 million available to the University’s neediest
in-state students. Additional funds for this important new program will be
requested in the 2002 short session. And as required by the Board of
Governors, all campus-initiated tuition increases must include an aid component
sufficient to hold harmless all students who qualify for need-based aid. In 2001-
02, one-third of all revenues generated by campus-initiated tuition increases—
$8.8 million—was set aside and redistributed as financial aid.

    Source: UNC Division of Program Assessment and Public Service
    Source: UNC Division of Program Assessment and Public Service

Early evidence suggests that recent UNC tuition increases have not led to
significant increases in aggregate unmet financial need or student borrowing.
Reflecting the growing pool of financial aid available, the percentage of in-state
degree-seeking UNC undergraduate students with unmet financial need actually
fell between 1998-99 and 2000-01, even as tuition and required fees rose.
[Figure 7] During the same period, the percentage of these students with
outstanding loans remained fairly constant—about 38 percent—and the level of
average annual debt rose by less than $420, to $4,158.

                   Figure 7. Tuition/Fees & Unmet Financial Need

                                       $2,500                                   40%


                                                                                      Percentage of need
                    tuition and fees


                                       $1,000                                   35%


                                          $0                                    32%
                                                96-97 97-98 98-99 99-00 00-01     Average Tuition
                                                        Academic year             % with unmet need

Recent tuition increases appear to have had little measurable impact on the
enrollment of lower-income and minority UNC students. When expected family
contributions are adjusted for inflation since 1996, the percentage of traditional
UNC freshmen whose expected family contribution would place them in the 1996
bottom quintile of family ability to pay has remained fairly stable over the past five
years, at about 20 percent. And minority enrollment across UNC increased by
6.4 percent in 2001-02, more than double the 3.0-percent growth in white

Financial aid is not the only approach UNC is employing to sustain and expand
affordable access. Multiple efforts are underway to take the mystery and
confusion out of preparing for and obtaining the financial resources needed for
college, particularly for first-generation college students, who account for about
40 percent of UNC freshmen.

UNC is using a $7-million federal GEAR UP (Gaining Early Awareness and
Readiness for Undergraduate Programs) grant to significantly increase the
number of low-income North Carolina students who pursue and complete a
college education. The University-wide project targets middle schools in 14
counties across the state where the poverty rate is high and the college-going
rate is low. In addition, Appalachian State University, Fayetteville State
University and NC A&T State University received local partnership GEAR UP
grants in cooperation with high-poverty middle schools in their communities.

GEAR UP provides ongoing tutoring and mentoring, academic planning and
preparation, financial aid planning, college tours for students and counselors,
professional development for teachers, and new resources for Spanish-speaking

The College Foundation of North Carolina—a partnership between the College
Foundation, Inc., the North Carolina State Education Assistance Authority, and
Pathways of North Carolina—was created in 2001 as a “one-stop shop” that
provides all the information and resources students and parents need to plan for,
apply for, and pay for college. Through its website [] and toll-free
hotline [1-866-866-CFNC], North Carolinians can explore careers and academic
requirements, search more than 100 college websites, apply on-line for college
admission and financial aid, and find information on financial planning, college
savings plans, and the availability of loans, grants, and scholarships. Through
CFNC’s National College Savings Program, parents can choose from a wide
range of sound, safe financial investment portfolios that can make substantial
resources available to their children when they begin college.

Students as young as seventh graders are encouraged to establish private
CFNC “accounts” that enable them to maintain personal portfolios to record
courses completed, test scores, and accomplishments. The message is clearly
getting to students and parents via an extensive marketing campaign.
In 2001, its first full year of operation, the CFNC website averaged more than
1,500 visitors per day. [Figure 8] More than 70,000 personal student accounts
were established. And more than 10,000 electronic applications were submitted
to UNC campuses via CFNC.8

                       Figure 8. Average Visitors to CFNC Website Per Day




                                                                        J u ly




    Source: College Foundation of North Carolina

Across the 16 UNC campuses, a common set of baseline student services
related to admissions, registration, financial aid, and student life has now been
streamlined and web-enabled. Students no longer need to visit multiple offices
and stand in long lines. Through the Internet, students can submit and check the
status of their applications, estimate their financial aid eligibility, pay tuition and
fees, register for courses, and view their grades, among other services.

A web-based UNC Prospective Student Portal is being developed and can be
customized for individual UNC campuses. Linked to the CFNC website
described above, these campus portals will interactively guide prospective
students through the process of exploring various campus resources and
academic offerings. Once students have decided to attend a given UNC
campus, the portal will guide them through the required steps leading to
enrollment as a freshman or transfer student.

                   Figure 9. Measures of Access and Affordability

                        Enrollment Growth and UNC-going rates
                        Minority enrollment growth
                        Percentage of students from lowest income quintile
                        Enrollment of first-generation students
                        Average unmet financial need of NC students
                        Average annual student loan burden

The University of North Carolina has always played a pivotal role in preparing the
state and its people for the inevitable forces of change. It has done this
throughout its history by providing an excellent education at the lowest possible
cost to the people of the state. This heritage is one of the great strengths of our
University—one that we intend to extend to future generations of students.

February 7, 2002

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