Merit Aid Won’t Help Colleges Survive

May 05, 2014

In the summer of 1994, I interned at U.S. News & World Report, where I was assigned to collect data for the magazine’s annual college rankings, just beginning to grow in influence. A few years later, when I started reporting for The Chronicle, college-enrollment managers and presidents asked me about the methodology employed by U.S. News and just how much they could manipulate the rankings by attracting higher-caliber students. Their approach for moving up in the rankings was relatively simple: Offer financial aid to smart students, whether they needed the money or not.

Christophe Vorlet for The Chronicle
The merit-aid arms race was in full force by the start of the new millennium. But in 2000, some 53 percent of institutional aid was still going to needy students. As a result, few higher-education leaders worried about the consequences.

But as the cost of college continued to rise over the past decade—making it difficult for more and more families to pay the full tuition bill, or even close to it—the merit-aid game took another turn. With too many institutions using merit aid to play the rankings game, the strategy wasn’t proving as effective. Now some colleges needed "merit" aid to discount their prices to affluent students further up the income scale just to fill their classes and balance their budgets.

Instead of giving a $30,000 full ride to a truly needy student, colleges would give $7,500 discounts to four wealthier kids, allowing them to pull in at least some tuition revenue from each of them. Colleges continued to call it "merit" aid, so that parents could brag at cocktail parties that their child had won a scholarship. In reality, though, it was nothing more than "revenue-management aid," Brian C. Rosenberg, president of Macalester College, told me.

Rosenberg is worried about the difficulties that talented, low-income students face in paying for college, and he has waged an uphill battle to persuade his fellow presidents to halt the merit-aid arms race. Macalester has largely been an observer in that race. Some 97 percent of its $40-million financial-aid budget is need-based, Rosenberg said. That approach has meant that, particularly in recent years, Macalester has lost high-ability, full-pay students to lower-ranked institutions offering deep discounts. "I’m not complaining," Rosenberg said, "because we don’t face an existential threat."

But many institutions do. Just as merit aid eventually became a less-powerful tool in gaming the rankings, it is becoming less beneficial as an enrollment-management strategy. Indeed, merit aid has turned into a financial burden for many colleges. Even as they raise their sticker prices year after year, they bring in less cash from students. Net tuition revenue is flat or declining at three-fourths of public colleges and three-fifths of private colleges, according to Moody’s Investors Service. As a result, more institutions are providing packages that don’t come close to meeting students’ financial need.

Until now, most of the arguments against tuition discounts disguised as merit aid have focused on the consequences for financially needy students. What’s rarely discussed is how such a strategy can also be a losing one for an institution’s long-term survival. The problem is many colleges don’t even know where to begin unwinding their merit-aid programs, because the plans were designed by consultants using sophisticated algorithms. "They could do something only to the extent they understand what’s going on," Rosenberg said.

It’s easy for him to take the high road on merit aid when Macalester is sitting on a $654-million endowment and a healthy applicant pool. But less-wealthy institutions, too, can turn off merit aid. It’s been done. Take Franklin & Marshall College.

The Pennsylvania college started to phase out merit aid in 2009. The year before, Franklin & Marshall, with 2,300 students and a $285-million endowment, spent about 20 percent of its aid dollars on three principal kinds of merit awards (read: discounts) each year: $7,500, $12,500, and $15,000. Over three years, the college eliminated one of the merit awards, until the fall of 2012, when the remaining merit dollars were shifted to need-based awards and the overall need-based budget went up.

The results have hardly been catastrophic, academically or financially, Franklin & Marshall’s president, Daniel R. Porterfield, told me. He said the college had become more selective in admissions, that its yield rate (the percentage of admitted students who submit deposits) increased, and that the average SAT scores of incoming students have remained relatively steady (1305 the year before the change, 1302 last year).

The biggest difference is the economic diversity of the student body. In 2008, only 5 percent of the incoming class was eligible for Pell Grants (generally families with annual incomes below $40,000). Last year 17 percent of the incoming class was made up of low-income students.

To pull this off, Franklin & Marshall didn’t get a big gift or raid its endowment. Its financial-aid budget this year is $44-million, and three-quarters of that comes from tuition. In other words, it is just as tuition-dependent as most of the colleges where presidents claim they can’t afford to dump merit aid.

For Franklin & Marshall, the decision was partly about the long-term admissions picture. In the middle of last decade, as the trustees surveyed the higher-education landscape, they saw trouble ahead. The number of 18-year-olds, especially affluent, well-prepared high-school graduates, was declining in their primary recruitment areas. And as the price of college was spiraling upward, median family income nationwide was falling. The deepest talent pools in the future, board members determined, would demand need-based aid. "They felt merit aid didn’t necessarily offer an advantage for us," Porterfield said.

At a time when many colleges are trying to differentiate themselves through expensive marketing campaigns, Franklin & Marshall, Macalester, and a handful of others are trying to stand out to the growing number of students and their families who think the price of college is out of reach for them. But those small institutions attract only a fraction of the students hoping to enroll in college every year.

Many more college leaders should follow Franklin & Marshall’s and Macalester’s model. Perhaps it’s less about a lack of will than lack of interest. Pretty soon most of them won’t have much choice. Given the demographic and income trends, colleges—especially the less-selective and less-expensive ones—will need to shift more dollars to need-based aid in order to fill their classes. This is not just about helping low-income students. It’s about survival.

Jeffrey Selingo is a contributing editor at The Chronicle and a professor of practice at Arizona State University.