Could we end merit aid?

February 27, 2011

A friend who is also an Earlham trustee writes:  “Would higher education lobby against such a proposal? Could we (like-minded folk) make this happen?”  He’s referring to my proposal in the “Fixing Higher Education” series to “create stronger incentives against merit aid.”  “We need to be sure that as much financial aid as possible is being devoted to meet need,” I said.  “Every dollar of merit aid is a wasted dollar with regard to the national problem of access.”

Here’s the proposal:  “Tell colleges and universities they cannot award any federal financial aid (Title IV) if they award merit aid. That is, tell them they can award need-based federal financial aid only if they award only need-based aid…. Institutions would be free to continue awarding merit aid, but they would have to give up awarding federal financial aid if they want to continue doing that. (A smaller bore alternate: tell them they can only award merit aid if they are drawing real dollars for those awards from donor-restricted (not board-restricted) funds; no merit aid could be awarded on a discount basis.)”

My friend asks, “I assume that elite schools would be largely unaffected (because they have plenty of donor-restricted merit-aid funds), and the rest of us want to stop the insanity. Right?”

Not quite.  First, “elite schools” largely don’t use merit aid.  They have applicants in abundance for their scarce places.  They can avoid the use of merit aid and still fill their incoming class with students they want.  These institutions are largely “need-blind” in admission, but they also admit relatively small percentages of low-income students.  (It’s easier to be need-blind if you don’t admit many low-income students.)  Their discount rates (percentage of tuition they don’t collect because they are awarding financial aid) are relatively low.  So might such colleges and universities support ending merit aid?  Unlikely, because their posture on most higher education public policy issues is roughly “I’m alright, Jack.  Leave me alone.”  They know they are in a fortunate place, and they don’t want anyone to mess with their good fortune.

So how about the rest of higher education?  Many not-so-elite independent institutions are awarding merit aid, and increasing amounts of it.  That means they are awarding less and less need-based aid.  Deep down, I think their leaders probably understand that merit aid is not a good practice looked at from the standpoint of the nation as a whole.  And some of them know that merit aid practices are driving them deeper and deeper into a financial posture that cannot be sustained.  Why, because their discount rates keep climbing:  more and more merit aid is awarded to students who do have some ability to pay.  Where will it stop?  No one knows.  But I’m not optimistic that these leaders will come out and support an end to merit aid.  On the one hand, voluntary agreements won’t stop it.  If everyone else is NOT doing merit aid, you stand to gain if you award some:  you’ll likely draw some affluent, high scoring students away from your competitors, and even from the elite schools.  So there’s a temptation to do just a little more, and real risk if you try to award a little less.

Rather than a voluntary agreement, would these leaders support a federal ban on merit — my proposal.  The strong form of the proposal would say that colleges and universities couldn’t award ANY merit (non-need-based) aid if they also awarded federal Title IV dollars.  The weaker form says they could only award merit aid if they were drawing such funds from donor-restricted funds:  no pure discounts from the operating budget.  On the whole, I think many leaders would be tempted by such a proposal, but they’d worry about inviting stronger federal regulation of what they do.  The last few years have seen a succession of heavy-handed proposals from the federal government for more regulation of independent higher education.  They’d worry about what else might come with such restrictions on merit aid.

Less nobly, leaders of such institutions would worry about how their institution would fare under such a change in the rules.  And not knowing whether they’d benefit, and knowing their financial margin is thin, they’d prefer no change to a change that might dramatically alter the higher education landscape — even if it were a change that made sense for the nation.

Many public universities are now awarding merit aid, too.  (What does this say about their commitment to their public-serving mission?)  The calculus of their leaders would be much like what I’ve outlined above as the calculus for leaders of less-elite independent colleges and universities.

Finally, there are the leaders of public institutions who primarily serve low-income students.  I’m thinking especially of community colleges and some regional public universities.  They don’t award merit aid, and don’t (yet) see much point in it.  They’re worried about other things.  So I doubt they’d support such a proposal.

All in all, if such a change were to come, it would be a change that came over the opposition of many leaders, though not all, in higher education.  That saddens me, because it is unquestionably the right thing to do from the standpoint of educating the nation.

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About Doug Bennett

Doug Bennett is Emeritus President and Professor of Politics at Earlham College. He has a wife, Ellen, and two sons, Tommy (born 1984) and Robbie (born 2003).
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