A Way Out of the Merit-Aid Mess?

October 24, 2011, 8:19 pm

Last week, the U.S. Department of Education’s National Center for Education Statistics documented a dramatic—and disturbing—shift over time in institutional grants for undergraduates from need-based to non-need-based merit aid.

Of the $62 billion provided to undergraduates in grant aid in 2007-8, institutions were the single largest source, followed by federal, state, and private entities. In the academic year 1995-96, the report found, public four-year colleges provided 13% of students with need-based aid, and 8% with non-need-based merit aid. By 2007-8, the share of students receiving merit aid from public four-year institutions (18%) actually outnumbered the proportion receiving need-based grants (16%).

Private nonprofit four-year institutions, likewise, used to substantially tilt toward need-based grants, but no more. Whereas in 1995-96, 43% of students were provided institutional need-based grants and 24% merit grants, by 2007-8, slightly more (44%) received merit aid than received need-based aid (42%). Moreover, in 2007-8, the average amount of institutional merit aid exceeded the average need-based grant at both public and private four-year colleges.

In the report, grants which had both a merit and need-based component were considered need-based. Students in the highest income quartile were overrepresented among non-need-based merit-aid recipients, and students in the lowest income quartile were underrepresented.

Individual institutions often try to swim against the merit-aid tide. As a recent article by Beckie Supiano in The Chronicle notes, St. Mary’s College of Maryland is seeking to redirect aid away from merit to need-based grants, but the idea is facing some faculty resistance. Colleges worry about unilaterally disarming in the war for talented students with high test scores who can improve the academic quality of an institution, to say nothing of U.S. News & World Report rankings.

While merit aid may be rational for an individual institution, it is not particularly rational for the system as a whole. We all directly or indirectly help fund both public and private colleges, even though only 27.5% of Americans 25 or older end up with a four-year college degree, because everyone benefits when universities advance research and educate more students.

The public return on need-based aid is straightforward: it enables all of us to benefit from the contributions of students who, but for the aid, would not be able to attend and graduate college. This helps explain why all federal aid (even that which has a merit component) is means-tested.

The larger public benefit of state or institutional non-need-based merit aid to students who might well attend college with or without aid is much more difficult to justify. Merit aid may direct students to go to a particular institution or stay in a particular state, but it is unlikely to significantly increase the overall enrollment in college to the same extent as need-based aid.

Instead, merit aid is mostly a weapon in the battle for talent between states, or between individual institutions, which does not benefit the country as a whole. In the case of trade barriers between states, the Constitution prohibits the practice in recognition that such competition is destructive to the nation. So why should the federal government subsidize institutions of higher education engaged in merit-aid wars?

To restore more of a sensible balance between need-based aid and non-need-based merit aid, the federal government could stipulate that if an institution receives federal aid, it must in some measure prioritize need-based aid over non-need merit aid. The guidelines could look at the percentage of overall funds provided by an institution and the proportion of students receiving various kinds of aid. Historic practice could help guide the appropriate targets. For example, if 1995-96 benchmarks were used, public institutions would need to provide at least 1.5 times as many need-based grants as merit grants; and similar guidelines would govern the average size of grants.

Because almost all colleges, both public and private, receive federal aid, the same rules would apply to virtually everyone, and no particular institution would be required to waive the white flag on merit aid. The “peace dividend” of curtailing the merit-aid wars might even end up benefitting low-income students who would not otherwise attend college at all.

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vlghess

I think we need to remember that one has to be well into the upper middle class before being able to “afford” college without any aid. Put another way, the instruments by which means are tested screen out families for whom college costs remain a real stretch. Students from these families who work hard in multiple types of endeavors shouldn’t be denied the “merit-based” aid that actual meets real, albeit unacknowledged, need.
The middle class is squeezed more than it has been in generations. Let’s not, in the name of “access,” make it worse!
11191774

There are a couple of problems in this piece. The first and biggest is the failure to recognize that the terms “need-based” aid and “merit-based” aid are not even definable.

If you begin with the government’s EFC you are completely missing the point; although EFC is often referred to as “Expected Family Contribution” and most definitions of “need” flow from that, EFC is not–and never was–a estimator of how much families should be able to contribute to college costs. It IS–plain and simple–a switch the government throws to control expenditures on the federal level. When the wonks in the GAO tinker with the EFC calculations, it’s not to help families estimate their contribution, it’s to cut down on Pell Grant expenditures.

And if you go further, and look at the College Board/CSS Profile, it’s even worse: That’s a tool specifically designed to extract higher costs from sucker families who are obsessed with having a name-brand education at any cost.

A family with two children and a $140,000 income that after taxes takes home $110,000, for instance, has no “need” at an institution whose COA is about $40,000. But can we really expect that family to spend 36% of it’s available income (before mortgages, utilities, transportation, etc.) for college? I suspect not.

The second is the presumption that “aid” resides in a pot of money at the end of some rainbow. In fact, most places do not “spend” or “reallocate” this expenditure. It’s a discount, or variable cost that only happens when it’s backed up by revenue flowing into the university in the form of an enrollment. If you have a 100 admitted students in that $140,000 range and tell them all they don’t have need, you will enroll almost none of them, unless you’re one of the elite institutions in the nation that cater to the brand conscious. You will have no revenue, and you can’t “spend” or “allocate” that aid to someone else, because it does not exist in the first place.

Fix the definition of need before proposing silly solutions to a problem that does not exist.
co80121

@chronicle-8f2c72587779b217a77985a2cf0379fd:disqus You provide some very useful information which I largely agree with. However, it is your final line that gets me. The problem does exist and there is a ton of research which documents the problem. None of the info you share in any way refutes the fact that the problem discussed in this article exists. Likewise, why is this solution silly? I think it is worth serious consideration.
crababby

I agree with co80121. The problem does exist. A number of colleges now have a discount rate of 50% or more, and the majority of the “expenditure” (discount) goes to provide so-called merit scholarships. Colleges have hiked up their tuition (for years) and then turned around and offered it back in the form of these merit awards — increasingly at the expense of the needy family. A family pats itself on the back over a $10,000 a year merit award, and ends up paying $12,000 out of its own pocket for a sticker price $22,000 education, when the college’s actual E&G is more like $10,000. It’s not a simple problem, but I agree that this “solution” is worth serious consideration.. .
11142568

I am not clear what world Dr. Kahlenberg lives in. As other commenters have noted, financial aid is a counter-revenue item, a discount applied to the sticker price. Like all discounts, the goal is to “move the merchandise” and make the revenue projection. Many of our institutions have little or no endowment. Tuition from enrollment is how we keep in business. As much as we can, we would like to help students who have financial need, but we would also like to have qualified students who will be induced to come by a little discount. There was a time – pre-Reagan – when federal financial aid and state financial aid could help pay a very large proportion of tuition at moderately priced colleges. But that is long ago and far away. And we could serve more needy students. Unless we have huge endowments, we now need students who are very able or more or less able to pay They may be able to pay more, but are unwilling, and we need them to bring in our budgets on target. The economics of keeping our colleges afloat is very complex when the country has turned to the right, believes that government should be less, and taxes least. I remember watching Ronald Reagan early in his presidency talking about less spending in education. I said to myself. He is is going to destroy us. He didn’t quite succeed, but discounting strategies are part of his legacy. Peter Baker
caveat2

It is time to “invest” (with financial aid–tuition discounting) in those students who have the greatest probability of being successful. Why should some student whose family income is low and who has little probability of being successful be given any aid. I don’t invest in stocks that are likely to go bankrupt. I invest in stocks that have a high probability of producing a high rate of return on my investment. Education is no different.

THE ONLY CRITERIA for financial discounting of tuition should be probability of academic success. This success is not only retention success at the college, but success in the world, and an expectation of those students’ future alumni contributions, bringing acclaim to the college, recruitment of those applicants’ peers who will also go to the college (and are themselves able to pay the tuition –which pays the bills at the college!) without discounting, and generates a “demand” for admission.

All other criteria are uneconomical in the long and short-run to the college and the nation.
11191774

CO80121 and Crababby: The solution is silly because it uses meaningless terms to define the problem. And if you believe there is a problem because someone has used bad definitions in order to prove the problem exists, that’s really convoluted logic.

Let me repeat: There is no meaningful distinction between need-based aid and merit-based aid (at least until you get to the upper reaches of family income where it becomes obvious). So proposing that the government force institutions to do more of one undefinable thing instead of another undefinable thing makes absolutely no sense whatsoever.So, I repeat: Fix the definition of need before proposing silly solutions to a problem that does not exist.
wmahoney52

Not all federal student aid is means tested. While a student, and parent for dependents, must complete a FAFSA, anyone, regardless of income, is eligible for an Unsubsidized Stafford. Also, Grad students and parents of dependent students can receive a GradPlus/PLUS loan regardless of their income, assuming the can pass the simple credit test.

FAO person
idomeneo

Decisions on the “probability of being successful” are made by the *Admissions* office – it is not Financial Aid’s job, and they should not enter into that decision. Their job is to aid the students the admissions office identifies as promising.

“Why should some student whose family income is low and who has little probability of being successful be given any aid”

caveat2, you are coming very, very close to tying low family income with a lack of success.
How about this instead: fewer cost-effective failures and non-entities (GW Bush?, Dan Quail?, and an army of others bringing similar “acclaim” to their alma maters) taking seats away from the bright young talent out there among the “less-cost-effective” 90% of the population.

Funny you didn’t use “success” in your last sentence, as in what will bring success in the long-run to the college and the nation.
johnsondrj

It’s simply not an “either/or” situation, i.e. either merit or need-based aid, at most independent colleges and at many public universities as well.

When a student who is needy also qualifies for merit-based aid (almost always the case with the middle income students described here), the financial aid award will always include merit-based gift assistance first — and other need-based gift assistance will be added later. The calendar drives this. Students apply first for admission and submit FAFSAs later. Merit-based scholarships are often awarded in the fall based on students’ academic records – well before their FAFSA results are received on campuses, beginning in January.

Colleges know that the ego gratification of the merit-based scholarship (for students and their families) always trumps similar cash value (to the family) of a need-based grant. If students demonstrate sufficient need, their awards will include the merit-based scholarship; perhaps a need-based, college-funded grant; private, outside scholarships and grants; then Federal and state aid; etc. So, analyses that lump all aid into one-or-the-other buckets (merit vs. need-based) will always be off the mark. Much college discounting is a mixture of both.
idomeneo

I’d just like to comment that a household with an income of $140/$110K will have had discretionary income for some time now to make investments and set aside for their children’s education. A $40K tuition won’t amount to a sudden 36% drop in available income.
And a second child in a $40K/year college will trigger financial aid.

“The terms “need-based” aid and “merit-based” aid are not even definable.”

They are not “defined”, in the sense that they are not set in stone, and, as you pointed out, the formula will vary as a product of available funding. But when shrinking funds are not going to those who most need it, that is a problem that very much exists.
hansonjb

while the percent might be nearly equal between the number of students receiving merit and need based aid–i’m wondering what the $ amount is. many students receive merit aid at our school of $2500 while the need based aid students sometimes reach the full cost of tuition and housing ($50kish). so, how many dollars are going to merit and how many to need based aid?

i support need based aid but merit is important too.
idomeneo

“Colleges know that the ego gratification of the merit-based scholarship (for students and their families) always trumps similar cash value (to the family) of a need-based grant.”

LOL, so true.

But that’s middle class.
As a first generation student, I depended on need aid to get through college. I *never* applied for any scholarships, because it would have been a mountain of paperwork for a couple of hundred dollars here and there (vs. thousands for tuition), which would have been deducted from my other aid anyway.

For wealthy students not receiving need-based aid, merit scholarships are simply a gift to take home with them.
idomeneo

“Colleges know that the ego gratification of the merit-based scholarship
(for students and their families) always trumps similar cash value (to
the family) of a need-based grant.”

LOL, so true.

But that’s middle class.
As a first generation student, I depended on aid to get through college. I *never* applied for any scholarships, because it would have been a mountain of paperwork for a few hundred dollars here and there (vs. thousands for tuition), which would have been deducted from my need aid anyway.

For wealthy students not receiving need-based aid, scholarships are simply a gift to take home with them.
jgianandrea

Merit aid can be
interpreted as a ‘weapon in the battle for talent’, or in less severe words- it
is used to shape a class. Universities use merit aid to compete for the students
they want to attend their institution. But, as this article shows, the balance
between ‘need based’ and ‘merit aid’ is becoming lopsided. Less needy students
are getting more. What if there was an alternative to this? What if there were a
product that allowed schools to successfully fight the battle for talent without
giving more aid to the students that don’t necessarily need it? SAGE Tuition
Advantage is a low cost financing option schools can use to counter this effect.
Offering a low cost loan in lieu of some of the merit aid allows the university
to recapture some revenue and recycle it into additional need based awards.