Merit System? The Choices Colleges Make in Providing Financial Aid

Name the batch of funding that accounts for a quarter of the money that public universities dole out in financial aid. Can’t?

It’s called merit aid, and a large portion of the college-going public is paying its way through school relying on it. One-third of all undergraduates receive merit aid; the same is true for nearly half of all private school students. Hope Scholarships in Tennessee and Georgia are examples of merit aid programs, though merit aid often comes from the institutions directly.

Unlike federal grants that are allocated to lower-income students, merit aid, at least in principle, is need-blind. That upsets many scholars and advocates who believe this money should be guided toward students of lesser means. Such students generally have lower scores on standardized admissions tests and have higher barriers of entry into college than their more affluent peers.

Critics of merit aid also charge that the practice encourages colleges to chase wealthier students by offering them smaller merit-based awards, instead of providing larger need-based scholarships to lower-income students. The idea is that by convincing the wealthier students to enroll, the colleges will be able to collect tuition revenue that potentially benefits the entire institution.

Federal data show the use of merit aid has been on the rise since the mid-1990s. Back then 13 percent of public university students relied on need-based aid while 8 percent received merit aid. In 2007, the prevalence switched, with 18 percent receiving merit aid and 16 percent for need-based awards. The increasing popularity of merit aid occurred in a context of diminished state investment in higher education, putting pressure on lower-income students to take out loans or work long hours to afford their degrees. (Between 1980 and 2011 all but two states shrank their higher education spending by a range of 15 to 70 percent.)

But not every researcher is sold on the idea that merit aid squanders precious dollars. By encouraging wealthier students to attend their colleges with merit aid awards, admissions officers could help expose lower performing students to more competitive peers, which some studies show has a positive academic effect on the less affluent students. Also, by attracting wealthy students who can pay a larger share of their tuition bill overall, schools can dedicate more resources to low-income students.

Whether all places of higher learning are following that script is difficult to determine. A recent ProPublica analysis of institutional aid shows that whereas in 1996 schools used 34 percent of their own resources to offer grants to the poorest students and 16 percent to the richest who were still eligible for some financial aid, the gap had narrowed considerably by 2012. In that year, 25 percent of institutional grants were spent on the poorest enrolled students, and 23 percent on the richest.

Making the picture murkier? Some financially vulnerable private schools lean on wealthier students for their institutional survival. On the other end of the spectrum, private colleges with large endowments mete out virtually no merit aid grants, enrolling a higher percentage of low-income students and awarding them substantial scholarships.

The topic of institutional aid is complex, so the insights of experts can be key to producing accurate stories. EWA’s webinar ”Merit System? Covering Colleges’ Choices on Financial Aid” provides in-depth analysis and comments that you can use to shape your next college affordability story. Give it a listen and check out the PowerPoint slides, too.