The Surprising Value That Need-Based Aid Brings

In the academic year 2015-16, colleges and universities in the United States distributed almost $55 billion in institutional grant aid to their students, meaning that they discounted their sticker prices by that amount. Those dollars make college more affordable for students and families, but their impact on institutional revenues is not so simple.

Some colleges could fill their classes with students who would enroll even without the discount, and for those institutions this aid is a real expenditure. The purpose may be to ease financial pressures for students and families and/or to recruit students with desirable qualities such as high grades or an exceptional curve ball.

But for most colleges, discounting is a strategy crucial to the enrollment process: They would have fewer students and potentially significantly less tuition revenue if they insisted that everyone pay the full posted price.

It’s important, however, to ask not just how much institutional grant aid colleges are distributing, but also which students are benefiting. Is the aid going to low- and moderate-income students who would not be able to afford to enroll without it? Is it going to star athletes? Is it going to students with high test scores who could afford to pay but would be likely to choose other institutions if they weren’t offered a discount?

Drawing a line between need-based and non-need-based aid can get complicated. Institutions know how they have chosen their aid recipients. Did the students apply for financial aid, providing information about income and assets? Did a calculation of their ability to pay yield a measure of financial need that led the college to award them grant aid? Or did they receive a scholarship based on their high-school grades or test scores or on the recommendation of a coach or a music teacher?

A significant amount of non-need-based aid actually goes to students with financial need, helping them as much as a need-based award would. In 2011-12, some 41 percent of the non-need-based grants that were awarded to full-time students at private nonprofit colleges, and 26 percent at public four-year colleges, was non-need-based aid that helped students meet financial need. It was awarded for reasons other than financial circumstances, but it served the purpose of need-based aid.

Recognizing the difference between aid that meets need and aid beyond need is important for institutions because it affects the size, academic characteristics, and demographics of their student bodies, in addition to their net revenues. It is also important for higher education as a whole and for the society it serves.

Using aid to affect institutional choice may induce students to switch from one college to a similar one, while need-based aid is much more likely to increase the number of students who enroll in college at all or who enroll in the four-year institutions to which they aspire.

Colleges may see short-term gains from generous financial aid to students from affluent families — the colleges may move up in the rankings, or they may temporarily increase their net revenues. But some competitor institution is very likely paying for these gains and could get into a bidding war to stem the loss of desirable students.

On the other hand, aid to students with very limited resources is much more likely both to achieve the social goal of increasing educational attainment and to succeed in increasing the number of students enrolling in, for example, private colleges or four-year public colleges in a particular state.

Pricing data on the College Scorecard website suggest that it is not at all uncommon for the lowest-income students to pay higher net prices than those from families further up the income scale. Even when net prices increase with income, the gaps between groups are quite small. The number of Pell Grant recipients whom individual institutions enroll gets quite a bit of attention, and underfunding of need-based aid can have a significant negative impact on this very public measure.

But need-based aid doesn’t go just to Pell Grant recipients. A family can have an income much higher than $50,000 and still need help paying the price of a selective private college or even a flagship public. This is why need-based aid is not just for the poor; it is also for middle-income students and others whose circumstances make paying for college from personal resources particularly difficult. And this broader view is important for administrators to consider in weighing the role of need-based aid in the institutional budget.

Need-based aid is valuable for the nation, but it is also valuable for colleges. It’s OK if institutions increase this type of aid because of public pressure, but they should also understand that it is in their interest to enroll a socioeconomically diverse class. Moreover, excluding students for financial reasons means enrolling students with weaker academic qualifications or who are a more questionable fit just because they can pay.

Aid based on need is also good for the bottom line in the long run. The number of families who can pay the full price of tuition, fees, room, and board without financial assistance — especially at private colleges but increasingly also at public colleges — is small. Fighting over that limited number of students is going to end up depleting funds and leaving many colleges underenrolled. Need-based aid can ensure that qualified students with limited ability to pay can enroll in the institutions best suited to their needs.

This doesn’t mean that there is no place for non-need-based aid. Some institutions are full of students whose need they can’t possibly afford to meet. For those colleges, socioeconomic diversity means attracting more students from relatively affluent backgrounds who could afford to pay but need financial encouragement to bring them to a particular campus. Even some relatively well-resourced institutions with high admissions standards may find that they can’t both bring in a class and pay the bills if they don’t use their aid funds strategically to increase the number of students paying high net prices.

Institutional financial aid has multiple purposes. But for nonprofit colleges whose goal is to provide high-quality educational opportunities, and whose tax-exempt status is based on contributions to society, making attendance possible for students who could not otherwise afford to enroll should be near the top of the list.

Most institutions can’t accomplish this goal without careful financial management, which may involve giving discounts to some students who don’t really need them. There are always trade-offs, but remember this: Need-based aid is no luxury.

Sandy Baum is a senior fellow in the Income and Benefits Policy Center at the Urban Institute and a professor emerita of economics at Skidmore College.