The Hidden Truth Behind Merit Scholarships

• Colleges use merit scholarships to attract students and build the optimal entering class.
• Much of this aid goes to wealthy students, leaving less for students in need.
• So-called "merit" scholarships are simply tuition discounts used to entice students.
• Colleges argue that wealthier students underwrite aid for needier students, but evidence suggests otherwise.

Here's a fun fact: Colleges give more money to rich students than to low-income ones.

Read that again and let it sink in.

Sound outrageous? It's absolutely true. Despite all the rhetoric around access and equity, American colleges care more about enrolling the "right" mix of students, and part of that strategy involves enticing wealthy students with "merit" aid — even students who don't need it.

How, exactly, do colleges justify this practice?

Enrollment Management and 'Financial Aid Optimization'

In the late 1970s, when many private colleges were struggling to fill their classes amid a turbulent economy, admissions offices began adopting a practice known as "enrollment management." This practice involved teaming with the financial aid office to more effectively use scholarship dollars as a key element of the enrollment strategy.

Out of this merger, "financial aid optimization" was born, promulgated by independent consultants teaching college officials how to leverage aid as an enrollment driver.

Today's colleges still employ these enrollment techniques. Robert Massa, a longtime admissions leader and consultant who, along with partner William Conley, runs Enrollment Intelligence Now, explained financial aid optimization to BestColleges in the most basic terms.

"You don't want to spend a penny more or a penny less than you need to in order to get the class," Massa said.

Using sophisticated algorithms, colleges can examine macro data to determine the proper mix of aid needed to build the entering class it desires, and it can drill down to the individual level to predict how much aid is required to attract a particular student.

"It's understanding what the tipping point is to move a student from a 40% likelihood to enroll to a 70% likelihood to enroll," Conley said.

Not long after enrollment management took hold at private colleges, public universities began adopting these practices, especially as state funding cutbacks forced institutions to recruit more out-of-state students to bolster the bottom line. In this new "arms race" for students, according to New America, public colleges leveraged aid to increase revenue, fill their classrooms and residence halls, and boost their prestige.

For the vast majority of institutions, filling classrooms and residence halls was, and is, a major concern. Conley likened the enrollment process to how airlines adjust prices to maximize the potential of full occupancy.

"There are very few colleges in the country that don't need to use the airline system for setting prices," he said. "Most colleges have open seats and pillows with no heads on them."

Leveraging Aid to Attract Wealthy Students

Determining the right mix of students includes enrolling the right number of students who can pay the full cost of tuition, or close to it. And that's where the story takes a peculiar turn.

Over time, instead of keeping costs low, colleges have adopted a "high-tuition, high-aid" model, notes New America's Stephen Burd. High cost signals quality and prestige, yet it also burdens families who can't afford to pay tuition. So colleges "discount" tuition by returning tuition revenue in the form of scholarship aid. To lure first-year students, private colleges are discounting tuition by more than 56%, meaning they give back more than they keep.

Public institutions also discount tuition. New America's 2020 report, "Crisis Point: How Enrollment Management and the Merit-Aid Arms Race Are Derailing Public Higher Education," details the rise in financial aid allocations among public universities between 2001 and 2017.

Many public universities, the study found, increased their prices then provided tuition discounts to lure "affluent out-of-state students with decent standardized test scores" in order to "climb up the rankings and increase their revenue."

At the same time, these universities provided "so-called merit scholarships" to the best in-state students from privileged families so public institutions in other states wouldn't snare them with generous scholarship offers of their own.

From 2001-2017, the study revealed, public universities spent $32 billion on students who lacked financial need. The University of Alabama, it pointed out, was allocating more than $136 million of its financial aid budget per year to "relatively affluent students."

Given the zero-sum game nature of college budgets, every dollar allocated to wealthy students means one less available for those who need aid more.

"Most notably, at more than half of the public institutions (54 percent), the increase in affluent students came at the direct expense of low-income ones," the study noted. "In other words, these schools increased the share of students in the top 20 percent at the same time that they reduced the share from the bottom 40 percent."

In fact, a 2019 report by the National Center for Education Statistics found that "students in the highest 25% income range received a greater amount of nonfederal financial aid ($11,300) on average compared with all other income levels, including those in the lowest 25% income range ($7,500) ..."

Controlling for race and ethnicity, The Hechinger Report revealed that at private colleges, Asian (62%) and white (59%) students were more likely to receive discounts than Hispanic (53%) and Black (51%) students. Black and Hispanic students at public universities also received lesser amounts of aid than their Asian and white counterparts.

Ron Leiber, author of "The Price You Pay for College," concludes that "merit aid puts achievement before disadvantage."

"By not only admitting disproportionate numbers of affluent students but actually throwing money at them if they come," he wrote on NBC News, "the schools simply perpetuate the inequities."

Defining Merit Aid

But does merit aid truly reward achievement? Not necessarily.

Colleges award two forms of aid — need-based and merit-based. The former addresses the financial need of applicants based on FAFSA eligibility formulas, while the latter ostensibly rewards students for some form of academic or extracurricular success.

A small percentage of merit aid is funded by philanthropy, gifts typically earmarked for certain students based on geography, field of study, family background, and other factors. But most merit aid is unfunded, derived instead from tuition revenue and awarded as tuition discounts.

To colleges, the distinction between need-based and merit-based aid is largely moot. The two blend to constitute one fungible pot of money, Massa said, and the only meaningful difference relates to perception.

"Students really think that most merit scholarships are awarded as a reward for what students have done in high school," Massa said, "and, in fact, they're awarded because the institution needs to leverage that money in order to maximize their chance of enrolling that student."

But to students, it still looks like merit-based scholarships. And that perception matters.

A recent survey by Art & Science Group, a higher education consulting firm, found that students consider exclusively need-based financial aid packages relatively unappealing. Students of all income levels showed a strong preference for financial aid packages reflecting at least half merit-based aid.

"It's what the student and the family expect," Conley said. "They think they're entitled to some form of merit aid."

By doling out aid in the name of "merit" to wealthier families, colleges can attract students who tend to have higher standardized test scores (the current test-optional environment notwithstanding) and better college completion rates, which boosts rankings and prestige and increases the likelihood of four years of tuition income.

And although these students get a sizable discount, they're still paying something to attend the institution.

"If [a college] is going to have an empty seat and they're giving a student merit aid, then that student is paying room and board," Massa said. "They're paying for books. They're bringing some business into the cafeteria or the snack bar."

They're also helping to subsidize lower-income students by generating higher net revenue, creating the Robin Hood effect of tuition discounts.

Colleges must "pay for access and equity," Massa argued, enrolling students who require a financial incentive to enroll despite not necessarily having financial need.

"They also need to enroll students who have the capacity to pay very little," he said, "but in order for them to do that, they need to enroll some students who can pay. And in order for them to enroll those students, they need to discount the price through so-called 'merit' aid."

Yet the 2020 New America report aims to debunk the Robin Hood theory, at least as it applies to public universities, claiming those institutions don't use additional revenue realized from subsidizing out-of-state students to increase spending on need-based aid.

Universities "provide little evidence to suggest those claims are true," the report says. "And in fact, this argument is largely a smokescreen. That is because under enrollment management, financial aid is not meant to be used to meet financial need. With enrollment managers focused on increasing their schools' net revenue, meeting students' financial need is actually considered inefficient and wasteful."

Ivy League Policy Prohibits Merit Aid

Not every college awards merit aid because not every college has to. Since its inception in the 1950s, the Ivy League has adhered to a policy of only need-based aid, as do Stanford and the Massachusetts Institute of Technology, among a few dozen other schools.

"If you are wealthy, here is more good news: Nearly all colleges in the country give merit scholarships to rich students," journalist, speaker, and educator Lynn O'Shaughnessy wrote on her blog. "There are only about three dozen schools in the entire country that don't — including the Ivy League institutions — because they don't have to. These schools are overrun by wealthy applicants, so they don't need to offer a carrot."

What's more, all students admitted to these schools are meritorious, the argument goes, so singling out these students based on merit is somewhat gratuitous.

For the vast majority of colleges that do award merit aid, operating under the counterintuitive model of paying rich kids to attend — even at the cost of supporting low-income students more likely to drop out because of financial reasons — is merely a competitive tactic baked into the overall strategy of enrollment management.

"To put it bluntly," the New America report concludes, "leaving financially needy students with 'unmet need' is part of the game plan to ensure there is enough money to pursue the most-sought-after students."