Increasing Affordability by Reducing Divide Between Merit and Need-Based Aid

Words matter. And words chosen haphazardly or used carelessly can cause harm, even if the harm is inadvertent.

Such is the case with the vocabulary currently employed to differentiate the types of financial aid. On one hand, there is financial aid that is clearly based on need. College and universities have long felt it a key part of our mission to make it possible for deserving students to attend our institutions by helping to defray the cost of tuition, usually in the form of grants, but increasingly in the form of loans.

On the other hand, there is aid based on criteria other than need. This aid goes by various names: “leadership” awards, for example, or “merit” aid. NCAA Division One institutions include athletic talent as a basis for awarding aid. At Division Three institutions like Sewanee, The University of the South, where athletic scholarships are forbidden, “merit” aid awards can be used to woo strong students away from competitors by offering to discount the sticker price of tuition. These discounts do not typically come in the form of loans (after all, what sort of incentive would that provide?) but rather in grants of varying sizes, depending on the supposed desirability of the student.

Understanding the Problem

There are numerous problems with this approach. The first involves the aforementioned words. Distinctions drawn between those students receiving need-based aid and those receiving “merit” aid imply that, somehow, students with need may not be meritorious. Moreover, disguising non-need aid as “merit” aid obscures the fact that those aid recipients are deemed by a financial aid office to be capable of paying the full tuition price. Instead, institutions offer these students what are, in effect, coupons that reduce the actual price of attendance. If we are to be clear, we should both acknowledge that all aid recipients are meritorious and admit that some aid is being awarded to students from families who do not need it.

That acknowledgment does not mean awarding non-need aid is necessarily unfair or misguided. Institutions may well determine that maintaining the quality of their student body, or the size of an entering class, requires them to issue discount coupons to some of the students they admit (this is called the “discount rate” and, in fact, some very fine institutions have discount rates at or above 50 percent).

But most financial aid budgets at most institutions are limited. A dollar can be awarded only once. And there is increasing competition for those dollars, perhaps especially by families skilled at bargaining and, seeking the best deal they can get, play off one institution’s non-need offer against another’s.

The resulting arms race results in an allocation of precious dollars neither efficient nor just: inefficient because the dickering, if succumbed to, undermines the rational judgments made at the time financial aid awards were determined; unjust, because every budgeted dollar given to someone who does not need it is taken away from another who does need it. The results, over time, can be disturbing, as a report issued in 2009 discovered: Amanda Griffith, a professor of economics at Wake Forest concluded that “results using data from the College Board’s Annual Survey of Colleges and other secondary data sources suggest that the increased use of merit aid is associated with a decrease in enrollment of low-income and minority students, particularly at more selective institutions.”

Again, I stress: institutions have strategic enrollment goals, and non-need aid might be viewed by them as a necessary weapon in their recruitment arsenal. But awarding non-need aid has consequences and we need to be clear what those consequences are.

For not only does non-need aid risk skewing the socio-economic composition of a student body, it also risks driving tuition prices up, at least for the decreasing percentage of those families known as “full pays.” These families may unwittingly be subsidizing families who possess equal or greater resources and who are far more skillful in bargaining.

Finding a Solution

In recognition of this and other factors causing tuitions to rise faster than they ought, the University of the South, in 2011, made the first in a series of decisions to address this problem head-on. First, we cut tuition and fees (cost of attendance) across the board by 10 percent. Interestingly, of the few complaints we received, the most vocal came from families receiving “merit” aid who did not understand why their bills did not go down 10 percent (they did go down — these families also paid less than the preceding year, just not 10 percent less).

Next, we froze the 2012-13 tuition for returning students at the 2011-12 level (thus locking in the 10 percent cut for a second year) and set a higher rate for new students, which we guaranteed would not increase for four years.

Finally, we made a similar offer to students entering in Fall 2013 and raised, modestly, the tuition of seniors and juniors to a level below what they had been paying before the 10-percent cut, and guaranteed the juniors their tuition bill would remain frozen for their senior year. Thus, we moved to a “tiered” system under which freshmen pay the most, seniors the least and the price is guaranteed for four years.

This policy rewards success. It allows families to plan. And it works because we have also committed ourselves to a goal of meeting full need in our financial aid awards, reducing the number of non-need awards (some of which are endowed and quite generous), and making clear our first offer is our final offer, unless a family’s financial circumstances change.

The Outcomes

Since these policies were introduced, the size of the entering class, which had been ever so slightly declining, has grown from 401 in 2010-11 to 495 in the current year. Net tuition revenue per student has increased. More than 20 per cent of our admitted students are Pell Grant eligible. Yield has improved dramatically. The credentials presented by the new students continue to be stronger. And retention is higher. Correlation is not causation, but we believe there is some relationship between our pricing and these data.

Yet the jury is still out on one unquantifiable aspect of these changes. As this is written, the cost of four years at Sewanee is less, and sometimes considerably less, than the cost at any of the liberal arts colleges against whom we compete. And yet the lure of the “merit scholarship” might mean the prestige of a “merit” sticker on one’s metaphorical bumper is worth the higher price displayed on the sticker in the window. We shall see.

There was a time when the conventional wisdom held that the more an institution charged, the greater the value of its degree. “High tuition/high discount” was a way to make sure one’s place in the pecking order remained lofty. But those days are gone. Prospective students today are looking for value, and our experience suggests discounting run amok may well be on its last legs.