Merit aid: The practice of giving money to those who do not need it

This chapter examines some of the salient features ofmerit-based student financial aid. The author explores therole of merit aid in college admission and how it is usedin today’s competitive market.

Merit Aid: The Practice of GivingMoney to Those Who Do Not Need It

Raymond Brown

Merit aid is an umbrella term used for the vast majority of the myriad typesof nonneed-based financial aid available to students. It is exclusively gift aid;that is, merit aid refers to money that does not need to be repaid. In the ver-nacular, though, it is rarely referred to as merit aid. Instead, the term schol-arship has become a catchall for the many forms merit aid takes.

Over the past twenty-five or so years, the entire landscape with respectto scholarships has shifted. Even the language has changed. What oncewas a “grant in aid” is now a scholarship. Webster’s has followed suit: fiftyyears ago, scholarship was defined as “a foundation for the support of ascholar. . . .” In the dictionary’s most recent edition, scholarship is nowdefined as “financial aid awarded to a student,” with no mention of thatstudent needing to be scholarly. Or needing to be needy, for that matter.

To be sure, merit aid is awarded independently of a student’s “demon-strated financial need.” Demonstrated need in American higher education ismost often determined by one of two instruments: the federal government’sFree Application for Federal Student Aid (FAFSA) or the College Board’sPROFILE. Many of the most highly selective American colleges are amongthe small minority that employ the PROFILE as a supplement to the FAFSA.

Rapid evolution in merit aid has included the sources of these awardsas well. Years ago, scholarships were awarded from the payout of an insti-tution’s endowment. Today, the majority of scholarships at all but the mostwell-endowed universities (and even at some of those) take the form of

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“unfunded aid,” meaning there is no endowment supporting many of theawards. It is akin to our government’s continued printing of money to coverits debt. That practice is one cause of our country’s inflation, just asunfunded scholarships are one cause of the rapidly escalating costs of highereducation. Tuition costs rise in order to compensate for the revenue lost tothese unfunded scholarships.

The practice of tuition discounting—that is, “the use of institutionally-funded grants to help defray students’ college costs––came into vogue in thelate 1970s and has become standard form at the nation’s four-year collegesand universities” (Davis, 2003, p. 3). The goal of this practice is “to increaseracial, ethnic or income diversity on . . . campuses or to woo students whohave shown superior academic performance or other special skills” (p. 3).“The rapid increases in discounting have resulted in losses in net revenue,have not improved retention or graduation rates, and have caused institu-tions to decrease spending on instruction and other vital services to stu-dents” (Redd, 2000, p. 32).

Scholarships are awarded to essentially every subgroup of college stu-dents for just about every reason or attribute one could conjure up: aca-demics, athletics, leadership, music, art, theater, debate, leadership, religiousaffiliation, proposed course of study, state or country of origin, and so on.Academic scholarships are the most frequently awarded, yet in contem-porary conversation there is rarely a distinction made between being a“dean’s scholar” (usually academic) and a “debate scholar” (usually not aca-demic). Both are called scholarships and the general public has grown toaccept them as the same.

To be sure, there is no longer much scratching of the head when theformerly oxymoronic “athletic scholarship” phrase is uttered. As mostwould surmise, there is very little of a scholarly nature having to do with ajump shot or carrying a football. Nevertheless, what once was referred to asan athletic grant-in-aid has morphed into an athletic scholarship.

The fine and performing arts are not immune from this change.Although one might argue there is a significant intellectual elementinvolved in the performance of a Beethoven sonata, most would agree thatmusic—as with art, and theater—is more a function of talent than of aca-demic achievement. Yet we have countless music scholarships in highereducation.

Over the past decade, a division of merit aid that has come under attackis the practice of awarding minority scholarships, grants based entirely onone’s race or ethnicity. Since the 1996 ruling in Hopwood v. State of Texasoutlawing use of race in college admission, most colleges and universitieshave backed off using the word minority in the title of an award. Many col-leges have eliminated these scholarships entirely and experienced a result-ing decline in enrollment of students of color. Still others have renamedthese grants in the ongoing hope of attracting or retaining an ethnically,socioeconomically, or geographically diverse student body.

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What Are Merit Awards?

At this point, let us focus on awards defined above as “unfunded.” At manyuniversities, more than 90 percent of merit awards are unfunded and aretherefore little more than discounts against tuition—a rebate of sorts. Theyare intended to lure the prospective student into applying for admission orto induce her enrollment.

A great deal of research, including especially work done by the CollegeBoard, has shown a strong positive correlation between performance on astandardized exam (the SAT or ACT) and family income. Indeed, familyincome is often cited as the strongest predictor of a student’s performanceon such an exam. Drilling down into this assertion makes it easier to under-stand why this is so. Families of affluence tend to cluster together, demand-ing the best schools for their children (an important criterion in propertyvalues), with the means to attract the best teachers because of the salariesthey can pay. Further, the co-curricular offerings at these schools are thefinest to be found, all leading to an education to best prepare these studentsfor college.

If a student’s results on the SAT and ACT are the product of educationalopportunity, as the test creators routinely argue, then it’s logical to concludethat those from more affluent American neighborhoods will as a whole scorethe highest on these exams. If these exams are the primary element in thedecision to award an academic scholarship, then we are in essence fundingthe already wealthy.

Perception of Merit Awards

From this discussion, one can correctly infer that there are significant issuesassociated with the widespread practice of merit awards. At a minimum,there is a problem with perception. It is all too common for a high-pricedcollege to award a student a scholarship that does not reduce the net cost towhat the student might pay at a competing college that has also offered hima scholarship. On occasion, we hear, “College A (with a cost of $40,000) hasoffered me a $10,000 scholarship. College B (with a cost of $30,000) has offered me only a $4,000 scholarship. College A must regard me morehighly.” Maybe, but it will still cost the student $6,000 a year more to enrollat College A than it would at College B. The consternation that this com-mon scenario causes a financial aid professional cannot be overstated.

Moreover, the perception on the cocktail circuit of one’s child being ascholar is not trivial when it comes to the merit process. Indeed, much of thegrowth in merit awards has come in the form of “vanity scholarships,” thosenominal awards students receive, in some cases, simply for being admitted toa college. It is not uncommon to find some private colleges (some very goodones) with more than 80 percent of their freshman class on some type of meritscholarship. This is before even awarding those with need-based eligibility.



Many students who are offered an academic scholarship are also eligi-ble for need-based financial aid. One of the legitimate criticisms leveled atmerit awards is that they diminish the pool of money required to fund need-based aid. On a dollar-for-dollar basis, this is not entirely true because manyof those merit dollars go toward meeting a student’s demonstrated need, aphenomenon the financial aid community refers to as “meeting need withinmerit.” It is certain that merit awards divert funds that might otherwise beused to cover student need, but it is impossible to determine precisely howmuch. A few years ago, the higher education research group Art and Scienceproduced a study concluding that fewer than 7 percent of the Americanpopulation could afford the comprehensive cost of the average private uni-versity. To divert money from need-based aid to merit awards often exacer-bates the challenge of achieving a diverse socioeconomic population. Mostcolleges and universities assert that diversity is an important goal, and finan-cial diversity is but one of many attributes in achieving this aim.

Another, more general criticism of higher education is the trend towardembracing practices long associated with the business world. Most institu-tions wrestle annually with the question of whether or how much to increasetuition. In an attempt to understand the public’s perception of pricing, focusgroups have become common to support policy formation. My institutionhas engaged a fair number of focus groups in recent years, and one this pastspring stands out above the others. In a group of eight parents of prospec-tive students, a question was posed as to how each was planning to fund hisor her child’s education. Without exception, each parent predicted his or herstudent would earn a scholarship. When probed for what minimum aca-demic parameters might be required for such an award, not a single parentcould answer with any certainty. We had access to each student’s academicprofile (grades, class rank, standardized test scores), and though some werevery fine students, others would be considered marginally admissible in evena moderately selective admission climate. Nevertheless, the parents’ expec-tations of their children’s forthcoming scholarships were firmly in place.

An interesting aspect of these parents’ expectations is that each lived ina neighborhood of affluence, presumably one that would signal the ability topay all or most of the cost of a private university education. However, one ofthe more significant changes in attitude reported by the financial aid com-munity is the migration of a family’s “ability” to pay to its “willingness” topay. It is not uncommon to hear an aid officer lament, “Willingness to pay isinversely proportional to the ability to pay.” To be sure, much has been madeof the movement by the wealthiest families from higher-cost private univer-sities to their lower-cost, public, state-supported counterparts. According toMinnesota’s Private Colleges (2007), a larger percentage of Pell grant recipi-ents as a proportion of undergraduate students are enrolled among them thanat the University of Minnesota. This finding supports the position that inde-pendent colleges are populated by more than just the children of the affluent.

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What Has Prompted the Explosion of Merit Aid?

It seems that higher education has blamed U.S. News & World Report foreverything from shoddy journalism to global warming. It is tempting toassign some responsibility to the journal that introduced our industry’s firstsystem of rankings in 1982, roughly the period when merit aid began itsrapid ascent. Coincidence? Perhaps. Yet to lay blame at their doorstep wouldbe to deny responsibility for our own actions.

For decades, higher education has allowed SAT and ACT scores to playthe major role in determining quality. It is understandable why this has hap-pened; these tests are the only uniform measure widely available. In termsof predicting success, however, even a mediocre institutional researcher willdetermine that these tests do not possess a great deal of predictive strengthwhen used independent of other factors. The College Board itself has longargued that the high school record is far more reliable for predictive pur-poses. We assign too much weight to barometers of quality that are perhapsconvenient but not particularly important.

Still, a perfect 36 on the ACT or a 2400 on the SAT is viewed the same inConnecticut as it is in California. Parenthetically, the argument should be notedthat a 2100 on the new SAT—let’s say 700 Critical Reading, 690 Mathematics,and 710 Writing—may not necessarily be the same across the land because ofuneven opportunities for test preparation and other support services (such asa full-time college counselor, or family affluence) that one student has overanother. In any case, though, a disproportionate emphasis on these scores canbe found in colleges’ merit-awarding processes. Time and again, students witha second-rate high school record who have high standardized exam scores areadmitted to good schools, and they often receive merit aid for those test scores.Unlike test scores, a 3.5 GPA in one locale isn’t necessarily the same as it is inanother. Grade-point averages, grading scales, and class rank determinationvary wildly according to the rigor of one’s curriculum, the strength of theschool, and even the high school’s ingenuity in creatively ranking its students.

Further evidence of the role of test scores in the merit aid process isfound in the NCAA’s process of certifying student athletes for eligibility. TheNCAA’s sliding scale offers a grid signaling the gateway to qualification forthe most cherished of all merit aid at Division I universities, the full ride.The most mediocre but still-passing students, those with a 2.0 grade pointaverage in their core courses, can still be certified eligible to compete so longas they score a minimum of 1010 on the SAT or a combined 86 of the sub-scores on the ACT. These scores represent roughly the national mean ofboth exams and are one of the three criteria (the others being the numberof, and GPA in, core courses) in determining academic eligibility.

As guidebooks have gained in popularity, so too has the practice ofkeeping track of how the competition is doing. At least for a short time eachyear, much is made of movement up (or, God forbid, down) in the annual



rankings. Because test scores are an important piece of the rankings’ equa-tion, the temptation to overvalue them in the admission process is too muchfor many institutions to resist. Even Moody’s, the bond rating company,computes a “demand for your education” based in part on test scores andthe number of applications received in a given year.

Why Is This Practice Continued?

Whether one likes them or not, merit awards are likely here to stay. Thereare at least three primary reasons they will persist.

First, since the majority of private colleges, as well as an increasingnumber in the public sector, employ merit aid, they are a useful tool to repo-sition a college by enhancing its profile. If the institution wants more highachievers, as an example, scholarships have become the expectation of vir-tually all students sought for their academic achievements. Much like anathletic department that offers merit awards in the hope of producing win-ning teams, an admission office offers academic scholarships with the aimof yielding a higher freshman class profile.

As but one example, let us consider the National Merit Scholarship Pro-gram. National Merit (its shorthand name) has been around for a half-century. This past year, 1.3 million students sat for the Preliminary SAT(PSAT/NMSQT), the qualifying test for consideration in the National Meritprogram. From that group, about 15,000 students, or a little more than 1 percent, were designated National Merit Finalists. The PSAT is the majorplayer in the competition, but the student’s curriculum, her subsequentscores on the SAT, recommendations, activities, and an essay are also con-sidered in the competition. From the group of 15,000, usually a little morethan half are designated as National Merit Scholars. About 8,200 are so hon-ored (National Merit Scholarship Corporation, 2007).

Since the eighties, there have been several examples of institutions benton moving up the academic food chain by, in essence, “buying” NationalMerit Scholars. Texas experienced a bidding war for these academic eliteswhen two decades ago one of the state’s small private universities deter-mined it would take on the two largest public universities in the state forthe distinction of enrolling the most National Merit Scholars. Full-tuitionscholarships were used to lure the students to the private school, andthough it ultimately caused serious financial havoc it also succeeded in repo-sitioning the school as one of the leading universities in the state. Becauseof the significant financial outlay, however, the past twenty years have seenmost universities engaged in bidding for National Merit Scholars back offfrom aggressive attempts like these. Still, every year some school somewhereis willing to waive at least tuition to entice members of this group.

At this point, it would be useful to note that not all nonneed–based aidis merit aid. A school may wish to attract and enroll students of a particu-lar faith, or from an underrepresented race, or from another country. A per-

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son’s accident of birth hardly qualifies as merit; nevertheless, what an insti-tution values dictates where it spends its money.

The second reason merit aid will continue is related to the first. Themarket forces that are working in its favor when an institution choosesscholarships to attract better-caliber students are the same forces workingagainst or for its competitors as well. Surveying the academic hierarchy, onesees those behind employing the same tactics. So even though we have ourinstitutional eye on the competitors ahead of us, the merit aid we use simul-taneously allows us to fend off the competitors at our heels.

Finally, the use of merit aid is as basic as needing to “make the class.” Thefirst two reasons deal with sculpting the incoming class; the notion that evena mediocre student can be meritorious, and therefore worthy of merit aid, iswidespread through society. Indeed, because of the pecking order so promi-nent in higher education, one school’s skin-of-the-teeth admit is anotherschool’s Presidential Scholar. Further, if private universities are to compete withthe publics, they’ll do so on price only if significant and compelling reputa-tional issues accompany the higher cost. Absent those compelling reasons, theprivate school is forced to reduce its price. Using merit aid to effect this reduc-tion is the most easily controlled tactic at an enrollment manager’s disposal.

What Else Results from This Practice?

In an odd sort of logic, it is argued that the practice of giving money to thosewho do not need it actually helps a university’s bottom line. If we remem-ber that a disproportionately large number of the highest achievers (asdefined by many schools’ scholarship awarding criteria) come from the mostaffluent families, then it stands to reason that if we can enroll more of themwe can reduce the number of the neediest among our ranks. The premiseshould raise the ethical hackles of anyone reading this; however, the theoryas posited has been shown in practice to actually reduce the loan burden ofthose neediest students. The Robin Hood theory of economic redistributionwould suggest that those who are from families able to pay the full price willsupplement those who cannot. Merit aid helps mitigate the sting of a retailprice while at the same time honoring its recipient’s accomplishments.

The migration of need-based aid to merit-based aid is unrelenting. Inmost cases, merit aid has cannibalized a sizeable portion of need-based aidto the point that it is not uncommon to find more than 80 percent of a pri-vate university’s gift aid budget devoted to merit. As has already been stated,much of need today is covered by merit, but if this arms race continuesunabated it will not be long before many schools have essentially no need-based aid.

In recent years, public universities have become major players in themerit aid process. Georgia, with its HOPE Scholarship, was the first to estab-lish a merit award for students who posted a 3.0 GPA in high school. Otherstates have followed suit and in the process significantly depleted much of



their need-based reserves in favor of merit. Standardized test scores arebecoming a proxy for quality. For every college that awards merit aid on thebasis of an SAT score, the importance of the high school performancebecomes weakened. It is often the case that an impressive test score signalssome equally impressive native intelligence. But if the impressive score isnot coupled with a GPA of concomitant achievement, to award a scholar-ship is to tread on some ethically gray territory.

Over the past quarter-century, tuition hikes have been well in excess ofthe rate of inflation. The popular media have made front-page news out of theannual adjustment. In many places, tuition is doubling every eight years. Aspublic institutions become less and less regulated, that eight years can behalved. Every so often, some private, usually small college decides to dramat-ically cut its tuition to rein in its discount rate. For better or worse, these shiftsgain great media attention in the short run but afford no long-term relief forthe college. In the end, the extraordinary tuition increases we’re experiencingare at least in part tied to the increase in funds being reserved for merit aid.

What’s Down the Road?

The colleges and universities with the greatest resources will continue tocontrol the process. If they determine it is in their best interests to enroll awealthy student body, their endowments will enable them to do so by sus-taining the draw that escalating aid can exact.

At the most expensive private universities, there exists the possibilityof an evanescent academic middle class. There will be sufficient funding for those on merit aid as well as those who are among the neediest. How-ever, those who qualify for neither merit nor need-based aid will be forcedto go elsewhere, or borrow unconscionable amounts of money to attend.

As public universities continue on the road to deregulation, they toorun the risk of eliminating their middle class as they adopt more of the pri-vate school merit aid model. Other alternative schools are already scram-bling to fill the breach. Many of these are of the online genre; indeed, thelargest private university in America exists entirely online.

Colleges and universities are among the most resilient of all institu-tions. Yet unlike in other industries, it is rare when a new university is estab-lished. In recent years, there has been a proliferation of proprietary (orfor-profit) schools. However, over the past decade only one traditional uni-versity has been founded in the United States. University of California,Merced opened it doors in 2005 in California with more than eight thou-sand students, in an attempt to respond to the distress of the entire state’shigher education system. As our country continues to grow in population,the crowding will only get worse. If the competition by students for seats intraditional universities becomes as keen as the competition for students hasbeen over the past twenty-five years, perhaps then we will see a retreat fromthe merit aid madness we have made.

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References

Davis, J, S. Unintended Consequences of Tuition Discounting. Indianapolis, Ind.: LuminaFoundation, 2003.

Minnesota’s Private Colleges. “Information for Researchers” (http://www.mnprivatecolleges.org/audiences/researcher.php; retrieved Jan. 16, 2007).

National Merit Scholarship Corporation. “National Merit Scholarship Program” (http://www.nationalmerit.org/nmsp.php; retrieved Jan. 16, 2007).

Redd, K. E. Discounting Toward Disaster: Tuition Discounting, College Finances, andEnrollments of Low-Income Undergraduates. Indianapolis, Ind.: USA Group Founda-tion, 2000.

Additional Reading

Farrell, E. “Richer Students Receive Much More Merit-Based Aid Than Do Poorer Ones,Study Finds.” Chronicle of Higher Education (http://chronicle.com/daily/2007/01/2007011705n.htm; retrieved Jan. 17, 2007).

RAYMOND BROWN is the dean of admission at Texas Christian University.

Documents

Merit aid: The practice of giving money to those who do not need it