Merit Aid Explosion?

Last week, Congress approved legislation that would transfer more than $20 billion over the next five years from over-subsidized banks to need-based student financial aid. The primary beneficiaries of the legislation are low- and middle-income students whose abilities to enroll in and complete college are restricted by balooning tuition costs. But this infusion of federal need-based aid could have a major unintended effect: colleges and states might shift more of their own resources toward "merit"-based aid.

While the federal government is dedicating its money to increasing need-based college access programs like the Pell Grant and making college more affordable, many universities and states continue to use their funds for a different purpose. Instead of giving students financial support based on need, they are doling out money based on grades irrespective of financial need (i.e. merit-based aid). In other words, colleges are subsidizing the education of affluent students who would have attended college without the extra financial aidspecifically to raise the college's ranking in the U.S. News & World Reports "Americas Best Colleges" issue and to attract students with parents wealthy enough to afford to pick up the rest of the tab.

Judging by data included in the latest U.S. News rankings report, merit-based aid remains as strong as ever. And we at Higher Ed Watch are concerned that the infusion of federal funding could lead to a merit aid explosion.

Merit aid is not just going to students at expensive private colleges. The annual survey of the National Association of State Student Grant & Aid Programs found that states spent $2.6 billion on financial aid programs with a merit component in the 2005-06 school year, an increase of 22 percent over the previous year. That means that the amount states spent on merit aid grew at a rate nearly four times higher than the amount they spent on need-based aid, which totaled $3.7 billion in 2005-06.

You just have to glance at the U.S. News report to see the popularity of merit-based aid programs at schools around the country. Of the 229 universities with financial aid data in U.S. News, all but ten (as a practice, the Ivy League schools do not give merit aid) offer merit awards. More than 50 percent (122 schools) provide merit aid to more than 10 percent of their students, and 12 percent (28 schools) give merit awards to more than a quarter of their students.

The worst part is that schools are prioritizing increased selectivity over increased socioeconomic diversity and lower student debt. For example, Emory Universitywith the ninth largest endowment in the country at $4.9 billionchooses to give 17% of its students merit awards that average $17,013. Meanwhile, only 12 percent of its students receive Pell Grants, and 34 percent graduate with an average debt of $24,272.

As the federal government pumps more money into the need-based financial aid system, there is a huge risk that colleges and states will shift their own funds away from need-based aid. Their logic would be: "The federal government is taking care of our low-income students so they dont need as much from us! We can give out more merit aid and pump up our SAT scores!"

Right now, as college tuition and fees continue to skyrocket, there is more of a need for financial aid than ever. Low and middle income students are in dire need all of the help that they can getfrom the federal government and states and institutionsin order to enter the doors of college in the first place and to graduate from college with manageable levels of debt.

If the ultimate goals of financial aid are simply to expand college access and increase college affordability, giving money to students based on merit is an ineffective and inefficient use of resources. Subsidizing the education of well-off smart kids isnt going to get us where we need to gomore students enrolled in college, more students graduating from college, and fewer students finishing their degrees with debilitating loads of debt.