Documenting the Shift to Merit

Public colleges -- flagship and 2-year alike -- spend hefty sums on aid to students without financial need, College Board finds.
September 12, 2006

It is more or less taken for granted, particularly by the general public, that private colleges charge hefty tuitions but also give their students significant sums of institutional financial aid in return -- sometimes aimed at students who need financial help to afford their educations, but increasingly as enticements in the intensifying competition for talented students, regardless of their ability to pay. Each year, the National Association of College and University Business Officers publishes a survey of of the extent to which colleges engage in the practice, known as "tuition discounting," and its study focuses exclusively on nonprofit, independent colleges.

In recent years, public colleges and universities, which traditionally have embraced a low tuition, low financial aid model, have increasingly begun playing the discounting game, too. Many policy makers and financial aid experts have been aware of that trend, but it has drawn little attention outside those circles, and data on tuition discounting at public colleges have been spare, until now.

A new study by the College Board, "Tuition Discounting: Not Just a Private College Practice," lays the practice bare. The study, by Sandy Baum, an economics professor at Skidmore College and senior policy analyst for the board, and Lucie Lapovsky, former president of Mercy College and now a consultant, shows just how much public colleges -- including community colleges, which are generally seen as bastions of the needy -- are joining their counterparts in the private nonprofit sector in handing out significant proportions of their financial aid without regard to students’ financial need.

“We find that only about 40 percent of the institutional grant aid in the public four-year sector fills documented financial need, while more than 60 percent of the institutional aid in the private sector and the public two-year sector is need-based,” the authors write.

That finding, they write, “raises serious questions about the extent to which institutional aid funds are being used to enhance access to and choice in higher education. Not only are significant amounts of institutional aid in the public sector being distributed based on criteria other than need, but a high proportion of dollars are allocated to students whose financial circumstances would permit them to enroll without these subsidies.”

William E. (Brit) Kirwan, chancellor of the University System of Maryland, is troubled by the findings of the College Board study. “I think higher education has lost its way, frankly, when it comes to the management and distribution of financial aid,” says Kirwan. "Institutions have been investing disproportinately, and these data show this, in merit-based aid at the expense of need-based aid." The situation is compounded by the fact that state programs like the Georgia's Hope Scholarships emphasize merit over need.

Kirwan acknowledges that he has, in the past, been part of the problem. "I will plead guilty," he said, to having built up the awarding of merit-based financial aid when he was president of the University of Maryland at College Park in the 1990s. "It seemed like a good strategy at the time, but the expansion of these programs -- and the focus on them almost to the exclusion of the increases in need-based aid, have reached the point where they're really doing substantial harm to our states."

The authors of the College Board study share that view, but their paper focuses on documenting the trend rather than bemoaning it (better collection of data on institutional financial aid has allowed the board to study the issue like never before, Baum said). They define the tuition discount rate as the total grant aid awarded by an institution divided by the total gross revenue it receives from tuition and required fees.

Not surprisingly, they find that private four-year colleges are likelier than other institutions to "discount" tuition by awarding institutional financial aid; in 2004-5, the average discount rate for those institutions was 33.5 percent, compared to 14.7 percent for public four-year universities (data were not available for two-year colleges for that year, but their average discount rate was 12.5 percent the year before, in 2003-4). Those rates are significantly higher than they were a decade earlier, in 1994-95, when the rates were 23.8 for private colleges, 11.7 percent for public four years, and 6.8 percent for public two-year colleges.

While private colleges may award significantly more institutional financial aid than do public ones, as a proportion of their tuitions, they are also much more likely than public four-year colleges and just as likely as two-year colleges to give out that aid based on students' documented financial need, Baum and Lapovsky report. (The researchers used data from the College Board's Annual Survey of Colleges, which shows whether aid actually met students' financial need rather than focusing on whether or not the aid was awarded with the aim of meeting need.) In 2004-5, public flagship universities gave 41.7 percent of their institutional financial aid to students with documented financial need, and other public colleges gave just 40.2 percent of their aid to needy students. The figure was 68.2 percent at private four-year institutions. Again, 2004-5 data were not available for community colleges, but the 2003-4 proportion for those institutions was 65.8 percent.

The College Board study cites several explanations for the proportions of non-need-based aid the institutions award. Athletics scholarships play a significant role at public four-year institutions (16 percent of the institutional financial aid at the public flagship universities and 18 percent at other public four-year colleges, or 3 percentage points of the institutional discount rate), most of which do not go to financially needy students, the researchers say. And public institutions -- especially two-year ones -- are often mandated by legislators or others to award tuition waivers to certain groups of students, such as veterans or teachers in certain high-demand fields. Sports scholarships and tuition waivers account for between a third and 40 percent of the institutional aid public colleges award, the study finds.

Despite those caveats, the researchers say they were struck by the proportions of financial aid at public institutions that is not need-based. The high figure at four-year non-flagship institutions "means that public four-year institutions are using the significant majority of their aid to 'shape' their classes," they write.

And although community colleges have increased the proportion of their financial aid that is need-based in the last few years -- to 66 percent in 2003-4 from 58 percent in 2000-1 -- "the fact that 34 to 40 percent of the grants these colleges award to their students are for purposes other than meeting need raises significant raises significant public policy questions," especially "given the role of community colleges as open access institutions educating large numbers of students from academically and economically disadvantaged backgrounds," Baum and Lapovsky write.

(One important twist: While the average proportion of need-based aid given by two-year institutions was about 66 percent, the median amount was 88 percent. That suggests that the awarding of non-need-based aid by community colleges is heaviest in a relatively small number of institutions.)

In the report and in an interview, Baum and Lapovsky offer some possibly positive trends. First, they note that the proportion of aid that goes to needy students has actually increased since 2000-1. The researchers offer one possibly negative reason that's so -- as tuitions have risen sharply over that period, so too have the proportion of families that show financial need, "making it more likely that grants awarded on the basis of other criteria will serve to support need." (In other words, colleges' awarding of need-based aid may be increasing, but not because they're trying to do so.)

But there are also clear signals that college leaders are increasingly recognizing the importance of need-based aid and, to a lesser extent, the potentially damaging effects of merit-based aid. A small but growing number of high profile public and private universities have in recent years announced new programs aimed at increasing access to their institutions for students from low-income families; a group of them are meeting this week at the University of North Carolina at Chapel Hill (see related article.)

The issue has also caught the attention of the Secretary of Education's Commission on the Future of Higher Education, which had as one of its central themes the need for governments and colleges alike to provide more need-based aid (though its final language used much softer language to discourage the use of merit-based financial than some of its early discussions portended).

Those trends are hopeful, but given that states and the federal government are unlikely to radically increase the amount of need-based financial aid they provide, given the longterm economic constraints many of them are likely to face, Baum and Lapovsky say it is incumbent on college officials, legislators and others to consider altering the distribution of money they already provide.

"There are a significant amount of dollars out there going to students that could be redirected," Baum said. "The major public policy question out of this study is: Do we want public institutions to be using their dollars to be attracting 'better' students or do we want them to help needy students?"


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