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Antitrust Restrictions and Need-Based Aid

In an earlier post, we argued that that the antitrust exception that allows the NCAA to regulate the scholarship offers colleges make to athletes is harmful to both athletes and their institutions. We promised a more detailed explanation of why we think that, in contrast, antitrust restrictions on institutional financial-aid policies are too stringent.

We are not the first to make the case for allowing colleges to have conversations, and even make agreements, that would limit the extent to which they try to “buy” students from each other. But periodic reminders about this important issue are constructive. Since the Justice Department intervened to put an end to the Overlap Group in the 1990s, college financial-aid officers have been afraid to talk to each other about their financial-aid practices without a lawyer in the room. Although the law in this area remains unsettled (the only case ever brought was settled out of court), the cost to a college of a successful antitrust prosecution would be enormous.

In 1994, Congress passed the “568 rule” as part of the Improving America’s Schools Act. This provision allows colleges that are need-blind in their admissions policies to agree on common principles for awarding financial aid without risk of prosecution. But few selective institutions can afford to admit all qualified students regardless of their financial circumstances, so they can’t take advantage of this exception. Some are need-blind except when they take students off the waiting list. Some are need-blind until they get to the lowest 5 or 10 percent (or more) of their acceptance pool. They view their alternative as being unable to adequately support accepted students who can’t afford to pay.

Despite the realities that many students are struggling to pay for college and that there is not enough financial aid to go around, colleges (both public and private) are devoting considerable portions of their budgets to “merit” aid. They are using their scarce resources to compete with other institutions for talented students. It is not difficult to see how this sort of competition can escalate, with competing colleges bidding up the price of students with high test scores, leaving colleges with fewer dollars to educate students and tubsidize those who cannot afford to pay.

Many college officials understand the long-run futility of this practice, but don’t believe they can stop it on their own. If they refrain from the merit-aid game, they will lose the most desirable students—and possibly fail to fill their classes at all. However, if they could agree with other institutions to devote their resources to need-based aid, they could do more to increase educational opportunities. The current winners are the talented (and mostly upper-income) students who get merit awards, sometimes paying less than their lower-income counterparts for the same education. The losers are those who are priced out of the colleges of their choice, the colleges whose student bodies are more homogeneous than they need to be, and society with its misallocation of resources.

The antitrust exemption should be broadened to allow colleges to better target their financial-aid dollars on those who need the money most. Just criticizing colleges for their failure to uphold the highest ethical standards, given that these standards are simply out of reach for many colleges, won’t solve the problem. A cooperative effort is needed—the kind of cooperative effort that is currently allowed for athletes, but not for other students.

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