We Give Merit Aid, You Discount

October 26, 2011

I give merit aid, you discount, and we are all in the midst of dramatic re-pricing.  Last week, Inside Higher Ed ran a good piece about “The Rapid Rise of Merit Aid” based on a report from the U.S. Department of Education’s National Center for Education Statistics (NCES, not to be confused with NCIS) charting trends from 1995-96 to 2007-08.  This follows the useful annual report from the College Board on “Trends in College Pricing.”

A recurring conversation on the Earlham Board of Trustee’s Property and Finance Committee concerned tuition setting.  One group of trustees (call them tuition doves) thought our tuition was too high and rising too fast, and that we ought to moderate any future increases.  Another group (call them tuition hawks) thought we were under-priced relative to our competitors and ought to bring our charges in line with those others.  The doves would regularly argue that the pace of tuition increases for all colleges like ours were unsustainable, that there would be price resistance from families; the hawks would respond that when those market corrections came, we wanted to be priced with others (not lower) and that there would be no advantage — indeed a disadvantage — to having moderated our charges earlier than others.

I imagine very similar conversations have taken place on the board of trustees of every independent college and university in the United States, and on the boards of most public institutions as well.

In these discussions, I always hoped that everyone understood we were talking about sticker prices, and that many (most) families paid less because of financial aid, either need-based or merit-based.  I took to the practice of annually giving the trustees a table that showed what five representative students would pay net of need-based aid: students from a family at 20% percentile point of the American income distribution, one at 40%, one at 60%, one at 80% and one at 95%.  We did two versions of this, one for Indiana families (because they could receive extra state need-based aid) and one for non-Indiana families.  And to the best of our ability, we provided the same information for what the net price would be for these five students if they enrolled at Indiana University-Bloomington.

In Earlham’s admissions overlap group were (and are) colleges that do only need-based aid and colleges that aggressively do merit-aid.  Earlham found itself in the awkward middle, doing some merit aid to avoid losing too many students to the aggressive merit aid colleges, but trying to emphasize need-based aid.  One consequence of our market position, and one freely chosen, was to have a larger-than-most percentage of students eligible for Pell grants  Our Pell percentage averaged around 20% of non-foreign students.  Our admissions competitor — from both groupings — tended to average around half that percentage.

Over the past decade we found that the the market in which we competed was changing rapidly, and it wasn’t just our segment.  The great recession only seems to have accelerated the shifts in pricing, gross and net.

The College Board report shows that, especially for public institutions, state support is declining, federal support has increased somewhat, but the burdens on students, parents and families have increased significantly.  The NCES report shows that, especially for independent colleges and universities, there was a marked shift from need-based to merit-based even before the recession, and my guess is that shift has only accelerated since 2007-08.  Here’s one glimpse from the IHE article regarding four-year institutions:

In 1995-96, private nonprofit and public four-year colleges were far likelier to give need-based grants than merit-based ones (by margins of 43 vs. 24 percent at private nonprofit colleges and 13 percent vs. 8 percent at public universities). In 2007-8, 18 percent of public university students received merit-based awards and 16 percent received need-based grants; at private colleges, 42 percent received merit aid and 44 percent received need-based assistance.

These trends are a disaster for access to higher education among students from lower income families because they will be less able to pay the higher tuition charges and less likely to receive financial aid.  The increased merit aid will pull money away from genuine need and towards students from higher income families.

Colleges and universities like to call non-need-based aid “merit aid,” and justify the practice on grounds of rewarding and attracting “better” students.  But with the dramatic expansion of merit aid, it is increasingly clear that that the aim of such aid is to attract enrollments from higher income students.  Awarding ‘merit aid’ means colleges don’t capture the full price, but the practice does allow them to garner a portion of the sticker price. It is more properly called discounting.  The aim is to maximize net tuition revenue, but increasingly colleges (especially independents) are in a price war via discounting.

We are in the midst of the re-pricing that boards of trustees have been talking about.  But this re-pricing is less to be seen in sticker prices than in net prices.

And wouldn’t you know it, we’re coming up on the deadline for colleges and universities to have a “net price calculator” on their websites.  I’ll be writing about these soon.

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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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