Merit aid is a form of financial aid offered by colleges and universities that does not consider a student’s financial need. These merit scholarships (or awards) are mostly tuition discounts to recruit new students, they’re just not marketed that way. Data shows us that financial friction is the number one reason millions of students are not going to college or are leaving with debt and no degree. So, does merit aid make sense anymore when so many are in need?
Merit as a discount
Using merit or financial aid as a strategic tool to recruit students began back in 1976. Boston College’s president at the time, Jack Mcquire, coined the term “enrollment management.” He developed a strategy to help bring Boston College from the brink of bankruptcy, as hundreds of students were leaving the school without graduating. Mcquire’s success led him to start his own private consulting firm. Other firms joined his ranks, and strategic use of financial aid (a.k.a. “financial aid leveraging”) spread within the private college sector.
Today’s average tuition discount rate for private colleges and universities reached 54 percent, per the National Association of College and University Business Officers (NACUBO) 2020 annual study. This means there are private institutions with discount rates greater than 54 percent. But discounting costs isn’t just a tactic for private institutions.
State disinvestment and institutional status-seeking have led many public colleges and universities to join private institutions in the merit aid arms race to recruit students. Throw in the looming 2025 enrollment cliff and a global pandemic, and staying out of the merit race becomes nearly impossible for those who want to compete. Therefore, public flagship and research universities are not alone in the race. Regional state colleges have also joined in and are devoting larger shares of their institutional aid dollars to non-need students than their better-resourced counterparts.
Discounting the problem
Everyone loves a discount. It’s why companies like Groupon exist, and it’s why we have entire days dedicated to discounts, like Amazon Prime Day and Cyber Monday. So, why is tuition discounting a problem? For starters, paying for college is wildly different than buying an Instant Pot or booking a day at the spa. Most students need financial aid, the process is complex, and students must apply every year. Like healthcare, the cost of higher education has risen dramatically over the past two decades. Unlike healthcare, however, those going into bankruptcy can expunge their healthcare debts but not their student loans.
Moreover, students were experiencing food and housing insecurity prior to the pandemic, which is a significant cost for college students today. With consumer prices rising at the fastest pace since August 2008, these woes are almost guaranteed to get worse.
So, offering discounts to students without consideration of financial need alienates the majority of college students.
Why do colleges continue to do it then? Many feel they are in a zero-sum game. Play the game and you have a chance to survive another day. Otherwise, your competitors will outbid you: A real catch-22. And schools know this is unsustainable. Just like companies can only discount so much to stay competitive, higher ed may be on its way to more Amazon-sized schools but a lot fewer local colleges and universities.
To prevent an arms race of their own, professional sports leagues instituted salary or wage caps. Caps are set based on prior-year revenues and agreed to by team owners and player associations. The caps are supposed to be equalizers (by preventing big market teams with unlimited capital from signing all the best players, thereby leveling the playing field.)
So, why would big market teams agree to a cap if the goal is to win? They formed a co-opetition: Big market teams cooperate with their competitors because they understand winning at any cost isn’t winning long-term. Bringing more fairness to the game makes the product better and increases the likelihood of its survival. Should colleges and universities form a co-opetition and cap on merit aid?
To cap or not to cap
A recent article from Inside Higher Ed suggested it was time to cap merit offers to 25% of tuition for all institutions receiving Title IV aid.
But unlike pro sports, there are challenges with capping merit aid. First, it requires federal and/or state legislation to enforce it. Secondly, it does not prevent institutions from just continuing to raise prices, thereby having greater merit offers because the cap is based on a percentage of costs.
Capping merit aid offers in states like Texas may have some benefit within the state, because Texas is freezing tuition increases for state institutions. However, Texas will allow institutions to raise tuition at the rate of inflation which is on the rise as noted earlier. Furthermore, states like Missouri recently voted to remove a cap on public college tuition increases. So, without understanding and addressing tuition inflation, merit aid capping will be less effective.
The merit of taxation
Back to professional sports: Major League Baseball (MLB) doesn’t have a salary cap. They have a luxury tax or a “Competitive Balance Tax.” Teams are progressively taxed increasingly every year they spend on players over the threshold or “soft cap.” The taxes collected are distributed to player benefits and an industry growth fund. The National Basketball Association (NBA) has a salary cap and a luxury tax. Teams going over the cap are taxed, and the proceeds are distributed to other teams in the league. Luxury taxes are different than revenue sharing because the taxes are meant to discourage outspending other teams. But like revenue sharing, the taxes collected can be used to benefit the league. Should there be merit taxation over a certain threshold?
Whatever the future holds for the merit aid versus need-based aid balance, some institutions are not waiting around to make the shift. And they would be right because evidence suggests a need-based policy is better at reducing inequality than a merit-based one.
Let’s play Meritball
The University of Kentucky and the University of Pittsburgh are moving away from merit aid to provide greater amounts of need-based aid. You might think of them along similar lines as the storied Oakland Athletics baseball team featured in the best-selling book and feature film, Moneyball.
The Oakland A’s went against the conventional, outdated, subjective and flawed “wisdom” of their competitors by seeking out overlooked players because they didn’t fit the description of the “full player.” In higher ed, the ideal student might be considered the “full payer.”
The A’s understood that the “ideal” or “full” players they were losing to other teams could be made up by acquiring more players with traits that translated to wins, like players who get on base, even if it is by getting a walk instead of a hit.
Overlooked and undervalued
Where are today’s overlooked students? They’re everywhere: They’re the students not offered discounts because they don’t beat the national average for test scores (or have any test scores at all); the students who cannot load up a resume of activities because they are working when not in school in order to help support their families; they’re the students who dropped out and can’t re-enroll because of a small balance on their account. Giving these students a chance is a win, like Wayne State University’s Warrior Way Back Program, which removes small balances to allow students to return to school.
A true higher ed co-petition may be needed to really get a hold on the merit aid arms race. It can start in a state like Utah, which canceled two popular merit scholarships to shift millions to students who can’t afford college. Eventually, the shift needs to cross state lines, but models are popping up that schools and states can follow if they don’t want to keep playing the same game.