Merit Aid Is a Lie

“OK, folks, where’s the real aid? It’s here! No, it’s here! No, it’s here!”

In an article titled “To Keep Students, Colleges Cut Anything But Aid,” the New York Times reports that:
With the economy forcing budget cuts and layoffs in higher education, colleges and universities might be expected to be cutting financial aid. But no. Students considering a wide range of private schools, as well as those who are already enrolled, can expect to get more aid this year, not less. The increases highlight the hand-to-mouth existence of many of the nation’s smaller and less well-known institutions. With only tiny endowments, they need full enrollment to survive, and they are anxious to prevent top students from going elsewhere.
There’s nothing factually wrong with the article, but it’s also a good example of how language can obscure meaning. The practice the Times describes, which is used to some extent by the vast majority of colleges, is tuition discounting — charging students less than full tuition. This is what economists call “price discrimination.” In a normal market, price is determined at the intersection of supply and demand. But to maximize revenue, a firm doesn’t want to charge everyone the equilibrium price. It wants to carefully walk up the demand curve and charge each individual customer the most that they’re willing to pay. This is normally hard to do, because the amount of money a customer is willing to pay is, in part, a function of how much money they have, and most economic transactions happen at arm’s length — when I walk into a car dealership to haggle, the salesman doesn’t know if I’m living hand-to-mouth or if I hit the Powerball jackpot last week.
But colleges have an unusual advantage in their market, because in order to be eligible for financial aid, you have to fill out a long form disclosing your income and assets, and only then does the college decide how much to charge you. This makes price discrimination much easier. (Imagine if you had to do that to buy a car!) The good thing is that this ends up being a fairly progressive and economically efficient system — rich students pay more than poor. But it’s really not accurate to say that colleges are spending money on financial aid when they regularly discount their price below a published tuition level that is actually far above the equilibrium market price. If, for example, Georgetown raised its tuition to $100,000 per year and then charged everyone exactly the same amount that it currently does, it would report vast new aid “expenditures” that aren’t real. Nor would students actually be “getting more aid.”
More pernicious is the practice of dividing all financial aid into two categories: “need-based” and “merit” aid. Most people are in the habit of believing that words mean what they appear to mean, and so they assume that “need-based” aid is given to students who meet some generally-accepted standard of financial neediness, while “merit” aid is given to students who exhibit some kind of academic or other merit. In fact, only the former is true. Here’s one college official describing what merit aid actually means, in the Times article:
At Dickinson College, in Carlisle, Pa., for example, merit aid, at its highest, made up about 22 percent of the financial-assistance pie. The share declined to 6 percent two years ago, but crept up to 7 percent last year and will increase to 8 percent for next year’s entering class. “The families I’m concerned about are the near-misses — the $90,000 to $130,000 families, who almost qualify for aid but not quite,” said Robert J. Massa, the college’s vice president for enrollment. “Those are the families I want to target more merit-based aid to.”
Very clearly, there is nothing “merit-based” about that aid. It’s just financial aid for the middle- and upper-middle class, disbursed as part of Dickinson’s price discrimination program. Which is not to say there is no actual merit aid, there is, but I suspect the vast majority of the aid labelled as “merit” is actually disbursed for reasons like this. I personally know a very wealthy lawyer whose academically marginal son was offered “merit” aid at a number of private colleges that were obviously keen to enroll a student whose parents would pay close to full freight. “We were surprised,” he told me. “My son’s not a very good student!”
The problem with falsely describing this as “merit aid” is that it makes discussions of equity in financial aid policy more difficult to have. While financial aid spending has (caveats above notwithstanding) increased significantly in recent years, a smaller proportion of those dollars are going to true need-based aid. But if you complain about this, as I am known to do, the reaction is often “What’s wrong with merit? Shouldn’t we reward excellence? Isn’t that what this great nation is all about?” Followed by, depending on the person, a long disquisition on how the moral fiber of America is weakening and socialism is just around the corner (or has long since arrived).
The point being, let’s call things what they actually are.

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