The Death of “Merit Aid?”

No, don’t worry.  Merit aid is probably not going away.

But perhaps–maybe–the term “merit aid” could go away.

For years, journalists and other self-proclaimed higher ed wonks have bemoaned the growth in non-need based aid, somehow thinking that financial aid was a pot of money from which dollars were extracted. These types have become fond of leaping to the conclusion that a dollar spent on aid to “someone who doesn’t need it” represented a dollar less to give to someone who “needed it” and have concluded that this is why poor kids don’t go to college. And thus, all non-need based aid was labeled merit aid.

If you don’t work in higher education, you could be forgiven for thinking this.

In fact, with a few exceptions for the endowed scholarship funds that represent a tiny fraction of total institutional aid awarded, financial aid is a contra revenue.  You can’t “spend” it unless it’s backed up by a revenue transaction coming in. When your tuition is $40,000 and you offer a $10,000 scholarship, it just means you’ve agreed to educate that student for $30,000, usually because you have reason to believe she won’t enroll at $40,000.  In other words, 75% of something is better than 100% of nothing, assuming you have capacity, and enrollment on the margin doesn’t kick off additional expenditures greater than the incremental revenue.

Before tuition started increasing rapidly at the same time family incomes started falling (be sure to set the year filter on this visualization to about 2000), a lot more families could afford college.  Those who couldn’t had to fill out a fairly simple form to determine EFC, or Expected Family Contribution.  The gap between the cost of college and your EFC was how much financial aid you “needed.”  Only one problem, though: The thing right in the middle of the equation, that EFC figure, is pretty meaningless, or perhaps just not very precise. Like the “Peacekeeper Missile,” EFC was a label slapped on to deceive. In fact, it never really meant “Expected Family Contribution;” it was always simply a government index number designed to predict and control federal expenditures.

For years, this was perpetuated by the Overlap Group, a collection of colleges that shared information about applicants in an attempt to determine a common EFC for need calculations. This noble effort, they claimed, was intended to level the playing field and allow students to choose based on the “right fit” rather than costs.  Many people, including me and attorneys in the Justice Department thought it was price fixing, designed to eliminate competition. It no longer exists in its old form.

But if the group has had any lingering effects (other than the 568 Group) it’s that people believe “need” is intelligently and fairly codified. It’s not.  As I’ve written about on my data blog, the federal formula seems logical in its overall pattern, but is nothing short of bizarre in the details.  On average, if you make $185,000 per year and have one student in college, you have no “need,” and the first dollar of financial aid is often characterized as “merit aid.”  To most families who have incomes in this range, the idea is absurd, and they often believe the “merit aid” is what they “need” to make a private college affordable.

Thus, Stanford’s new policy of no tuition for families who make under $125,000 per year is interesting, as are the similar policies at Harvard and other super-selective institutions.  I want to be clear that I applaud these initiatives, and while students from these families may not get the same breaks in the admissions process as wealthier students, it’s hard to argue that this doesn’t make sense, even though someone has tried.

But if you scratch the surface just a bit, you see something interesting: In acknowledging that families cannot afford Stanford or Harvard despite what the EFC (or the Profile) formula says, these two institutions, always leading the charge of institutions who proudly proclaimed they only awarded aid based on “need” have done us all a favor.  (You could, of course, be cynical and argue that these policies are simply designed to grow applications from the bottom 80% of family incomes, in order to get even more selective, and that the arms race hurts us all, but for once, I’m going non-cynical here.)

Two institutions that matter, two institutions who get attention, have, by the classic definition, started awarding aid based on something other than need.  Historically, that’s been called “merit aid.”

In an upcoming Journal of College Admission, I write about Terms of Endearment, and include references to both need- and merit aid. I hope they go away.  And perhaps this is what we need to make it happen.  Keep your fingers crossed.

9 thoughts on “The Death of “Merit Aid?”

  1. Great thought provoking article, and much appreciated. I previously did not project the influx of new applicants and demand with the no tuition policy. I still argue the best route is taking control of one’s future by actively saving towards ones goal, as opposed to relying on these outside systems that will most likely change between now and the next 16 years when my daughter starts to go to college, but well written and nice tone in the article as well.


  2. You wrote, “…thinking that financial aid was a pot of money from which dollars were extracted.” While I know that that’s not true, I did have a Director of Financial Aid at a small private college say to me this year, “As a private college, we spend most of our money on merit aid, rather than on need-based aid.” And so they have left the family I’m working with a $15,000+ gap between the bill and the EFC (after loans). So while it may not be a pot of money, they are making choices about who gets the discount. And in this case, the discount goes to the kid they value more rather than the kid who needs it more.


    1. Thanks, Stacey. What this aid director was really saying was that they’d rather use $15000 in discount to endoll three students via three discounts of $5000 each which results in more net revenue to run the college.


      1. That make sense financially for the college, but it doesn’t make sense for the world. Sigh.


  3. Great post, Jon. The complexities of FA still twist my stomach in knots. I’m glad someone out there can explain things sensibly. I still wonder why upper- and middle-class parents seem startled when the time comes to pay for college, though. With 18 years to prepare, surely they might have done something? At the same time, I’ve had very well-to-do parents upset that the college their child wants to attend factors in their college-specific savings account to lessen institutional FA. I think most people secretly think college should be free.


  4. What you say makes sense however what happens when you live in the Northeast where the cost of living is so much higher than other parts of the country and the EFC claims $30000 per year for each child with 2 children in college. Clearly it is impossible to pay the bills. We have saved through the years but does not come even close to the amount the schools expect us to pay. It is scary to think with all we have done we still come up short. I am not saying I don’t want to pay my fair share but with our cost of living our dollars are not going as far. Even State schools are 22,000 a year these are daunting numbers.


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