Does “Merit Aid” Make Sense?

Businesses sometimes charge different customers different prices as a way to maximize revenue. Airlines, for example, usually charge more for seats reserved on short notice, on the theory that the traveler probably doesn’t have good alternatives and will therefore pay a high price. (Economists call it price discrimination.)

Similarly, colleges and universities sometimes also charge different prices (tuition) to different students. Schools have a full tuition rate, but offer some students a discount. When schools practice price discrimination, however, the motive isn’t necessarily revenue maximization.

Colleges give a discount to some students because they come from families with little income or wealth. To keep them from going to a lower cost school, the school gives them “need-based” aid, reducing their cost of attending—sometimes by a lot. Need-based aid can bring in more money, but it’s also a good public relations move, enabling officials to proclaim that they’re helping to combat inequality.

Many other students receive discounts because they are thought to enhance the school in some way.

Star athletes often get to attend for free, particularly football and basketball players who might make the school “a winner.” At many schools, the quest for prestige is mainly driven by sports.

Finally, some students get tuition discounts because they’re very sharp. Students with lustrous academic credentials are in high demand and many schools want them badly enough to give them a break on tuition called “merit aid.” But why?

One reason is that if college officials want to improve their U.S. News ranking (which, sadly, many Americans regard as a useful indicator of college quality), one of the factors they can influence is student selectivity. The U.S. News system gives schools points for enrolling students who had high standing in their high school classes (top quarter is good, top ten percent better) and did very well on their SAT or ACT critical reading and math scores.

In other words, merit aid helps make a school look more prestigious.

Another reason is that top students have numerous options. Often, they will have acceptances from a number of top schools, so if a somewhat less prestigious institution wants to land such a student, it needs to make enrolling there more financially attractive.

Still another reason is that the faculty is apt to be happier if the student body has a higher percentage of good students. Alexander Astin points that out in his recent book Are You Smart Enough? that professors would much rather teach smart students than un-smart ones. They’re more like them, more engaged with coursework, more malleable. So, administrators who care about faculty contentment can improve it marginally by using merit aid to draw in some sharp applicants who’d otherwise probably enroll elsewhere.

Merit aid, however, is controversial.

In a recent Hechinger Report column, e.g., Stephen Burd decried “The troubling use of ‘merit aid’ at public flagships and research universities.”

Burd is bothered by the high percentage of students who receive aid merely because  they’re very good academically, but aren’t “needy.” His latest research shows that many Association of Public and Land-Grant Universities devote substantially more money to merit aid than to students who have financial need.

He lists those APLU members that spent 100 percent of their aid on non-needy students, including Wichita State, Cal State – Fresno, and University of Texas – San Antonio. Also shamed for spending the largest amounts on merit aid are flagships such as the University of Alabama, Ohio State, Indiana, University of Michigan, and Rutgers.

Among the flagships that Burd praises for spending relatively little on merit aid is the University of North Carolina at Chapel Hill, which spends only 7 percent of its aid on non-needy students. (Best, in his view, is the University of Tennessee, which apparently dispenses no merit aid at all.)

Merit aid, Burd argues, harms low-income students. They have to pay an average net price of $11,785 per year at the high merit aid schools, compared with only $8,998 at the low merit aid schools. “Over four years, that difference adds up to more than $11,000,” he notes.

His math is no doubt right, but I don’t find Burd’s argument persuasive. The students he claims are “harmed” are no worse off than the great majority of students who don’t get any financial aid.

True, if schools did away with their merit aid and instead devoted the funds to financially needy students, their cost would be somewhat lower. But if those students benefit financially from their college studies, as quite a few do, the fact that their families are relatively poor is irrelevant. It’s the student’s future success that ultimately pays for the college education, not his family’s earnings.

The better policy, I maintain, is for states to keep the cost of attending all of their colleges and universities as low as possible without price reductions for any students.

So, no merit aid? The arguments for it aren’t persuasive either.

First, if colleges want to attract very sharp students, they can and should do so with evidence about their academic excellence. Want to fill up your classrooms with academically inclined, highly motivated students? Then show them that your degree offerings are so excellent that students should want to enroll at your school rather than another.

Second, states use merit aid to try to keep their best students from choosing a university in another state. Burd uses Wisconsin as an example, writing that University of Wisconsin officials plan to boost merit aid “to keep top Wisconsin students in the state. In recent years, some of the school’s Big Ten rivals have been luring high-achieving Wisconsin students to their campuses with generous offers of merit aid.”

This interstate competition for students with high SAT scores is pointless. Wherever they go to get their degrees, eventually they will enter the competitive labor market for their talents, a market where state boundaries and school locations don’t mean anything. Even if UW manages to induce a brilliant math student to go there rather than the University of Michigan or Harvard, that does Badger State citizens no good at all.

North Carolina has been toying with the same idea, incidentally. Governor McCrory has proposed merit scholarship program funded through the education lottery with the objective of keeping academically gifted state residents within the UNC system, providing they major in math, science, or a health-related field.

The problem is that the quantity and quality of STEM-related work those students will eventually do doesn’t depend on their attending any particular university. Citizens of North Carolina won’t be any better off if it becomes law. All this would accomplish is to slightly boost the prestige of UNC system institutions.

State universities should take the lead in getting out of the rankings/prestige game and not up the ante.

Private colleges are free to adopt any financial aid and tuition reduction policies they want, but state institutions ought to have uniform pricing, whether for college tuition, motor vehicle licenses, or anything else. If outsiders (alums and scholarship organizations) decide they want to spend money they’ve raised to help offset the cost of attending for individual students, they should be encouraged to do so.