The Changing Nature of Financial Aid
Colleges and universities are relying on merit-based aid to compete for the best students. The big losers in this competition are those students least able to afford college.
By Donald E. Heller
Historically, states, higher education institutions, and the federal government awarded financial aid to undergraduates based mostly on the financial need of students and their families. The rationale behind the use of "means testing," or assessing a family's ability to pay for college, is rooted in the ideals of the Higher Education Act of 1965. Title IV of that legislation, which authorizes the federal student financial assistance programs, opens with this statement:
It is the purpose of this part to provide, through institutions of higher education, educational opportunity grants to assist in making available benefits of higher education to qualified high school graduates of exceptional financial need, who for lack of financial means of their own or of their families would be unable to obtain such benefits without such aid.
A complex formula known as "needs analysis" took into account family income, assets, and other characteristics to determine the amount that a student and her family could afford to contribute to postsecondary education. The difference between the cost of attending the institution of the student's choice (including tuition, room, board, books, transportation, and other expenses) and the family's contribution established the amount of financial aid for which the student would qualify.
Over the past decade, however, a major shift has occurred in the way states and colleges and universities award financial aid to undergraduate students in the United States.1 oth states and institutions have substituted measures of academic merit for financial need as the basis for awarding grants and scholarships. And both are abandoning the concept of "exceptional financial need" as the factor determining who should receive aid.
State Grants
The 1972 reauthorization of the Higher Education Act created the State Student Incentive Grant (SSIG) program, since renamed LEAP (Leveraging Educational Assistance Partnership). The SSIG provided federal matching funds to states that implemented programs that awarded scholarships to students based on financial need. It proved to be a critical catalyst to the development and expansion of state grant programs. In 1969, nineteen states appropriated just under $200 million for these programs; by 1974, thirty-six states allocated $423 million to them. By 1979, every state and the District of Columbia reported at least one need-based grant program, and the total appropriation had increased to over $800 million, ac-cording to the National Association of State Scholarship and Grant Programs. Spurred on by the SSIG, states began to award most of their grant dollars based on the financial need of the student.
The creation of the Georgia HOPE scholarship program in 1993, however, initiated a transformation in state aid programs. Georgia's HOPE program was the nation's first broad-based, state-run merit scholarship program. It is funded by sales of lottery tickets. Before Georgia launched the HOPE program, states allocated less than 10 percent of their grant dollars to undergraduates without considering financial need. Since 1993, thirteen states have followed Georgia's lead and developed similar merit-based programs, although they use different criteria to determine merit and varying sources to fund the programs. Today, as figure 1 shows, merit-aid programs represent 25 percent of state grant dollars awarded to undergraduates without consideration of financial need, or over $1 billion.
The effect of these merit-aid programs on college access differs substantially from that of need-based grant programs. Merit grants go disproportionately to students who would have attended college even without the public assistance, while need-based programs help those who the research tells us require assistance to enroll in college.
Who Should We Help? The Negative Social Consequences of Merit Scholarships, a 2002 report I co-edited with Harvard University researcher Patricia Marin for the Civil Rights Project at Harvard, examined four of the nation's larger state-sponsored merit-aid programs. The programs used varying measures of academic merit—including high school and college grade point averages, SAT or ACT scores, and state curricular framework tests. Yet they all had the same impact on college access: "The students least likely to be awarded a merit scholarship come from populations that have traditionally been underrepresented in higher education. This hinders the potential to increase college access among minority and low-income students."
Specifically, the study found that in Georgia, more than 90 percent of expenditures on HOPE went to students who would have attended college anyway; the program was responsible for an increase in the gap in college participation between white and African American students. Florida and Michigan awarded grants disproportionately to racial majority students and students in wealthier communities (those with higher college participation rates). New Mexico's program also had no impact on college access (although it shifted some students from two-year institutions to four-year colleges or universities). Eighty percent of scholarship recipients were from families with incomes greater than $40,000 a year, above the state's median income of $38,000.
The political motivation behind these programs is clear. The scholarships disproportionately help students from middle- and upper-income families, those most engaged in and most influential in the political process in their states. Charles Reed, the former chancellor of the state university system in Florida, summed up the politics of merit-based aid in a story reported in the Sarasota Herald-Tribune in December 1997:
A man approached Chancellor Charles Reed in Miami recently to tell him what a wonderful university system Florida has. Reed asked him to explain. The man said his two children at the University of Florida were receiving new lottery-funded scholarships. But Reed was troubled when he learned that the man was an orthopedic surgeon who could easily afford university tuition without financial aid from the state. "Something is really wrong when you do that," Reed said. . . . "When you can give something away to the middle and upper-middle class, in politics, it doesn't get any better than that."
Institutional Grants
Financial assistance for individuals attending college has existed in this country almost as long as higher education itself. Institutions awarded many of the earliest scholarships based on students' academic merit, with consideration often given to financial need.
This practice was carried into the twentieth century, largely by private elite colleges and universities in the East. Recognizing the inequities of this system, and the lack of a common method for determining financial need, institutions banded together in 1954 to establish the College Scholarship Service (CSS) as part of the College Entrance Examination Board. The CSS developed a common formula to help institutions determine the financial need of their applicants, after which most private institutions began awarding scholarships based solely on financial need.
In the 1990s, however, colleges and universities, like states, began to increase the proportion of scholarships they awarded on the basis of merit. The funding for these awards usually originates from one or both of two sources: endowed scholarship funds and the recycling of tuition revenue.
Scholars and journalists have widely reported the prime factor behind the increasing use of merit aid by institutions: the increasing competition among colleges and universities to attract the best and brightest students in order to improve their placement in national rankings. Data from the U.S. Department of Education show that during the 1990s, scholarships awarded without consideration of financial need grew as a proportion of all grants funded by institutions. The data also show that, increasingly, higher-income students are the beneficiaries of these scholarships.
Table 1 shows the total dollars awarded nationwide by institutions in the form of need- and merit-based grants to students in three income groups. For all three income groups, merit grants grew faster than need-based grants. Among the groups, higher-income students saw the greatest increase in receipt of both types of grants. Overall spending on merit aid increased at more than twice the rate of spending on need-based grants.
Data from the National Postsecondary Student Aid Study, administered by the U.S. Department of Education's National Center for Education Statistics, show that in 1992-93, institutions awarded 34 percent of the grant aid (to students in all income groups) without consideration of financial need; by 1999-2000, this percentage had increased to 44. It is interesting that even within the category of need-based aid, higher-income students saw the largest growth in grant dollars, indicating that institutions probably used increasingly liberal definitions of financial need.
Conclusions
The growing use of merit, rather than financial need, as the primary criterion for the awarding of financial aid has important implications for college access in the United States. Research on tuition prices and financial aid over the past three decades has consistently found that, short of keeping tuition prices as low as possible, financial aid targeted at needy students is the best policy for increasing college access among underrepresented students. Merit scholarships, whether provided by states or institutions, are awarded disproportionately to students from groups that already have the highest college participation rates in the nation—white, Asian American, and upper-income students.
In an era in which tuition prices are rising much faster than the ability of families to pay for college-particularly lower-income families—public and institutional financial aid dollars need to be used in the most effective and efficient manner possible. As public policy analyst Thomas Mortenson observed in the February 1997 issue of Postsecondary Education Opportunity:
In the economic world of highly constrained social welfare maximization, giving scarce financial aid resources to people who do not need them is wasteful, unnecessary, unproductive, and comes at the price of adequate and appropriate student financial aid for others who could not afford to attend college without such assistance.
Note
The figure and table are available in the print edition only. Back to text
1. While the federal government's primary scholarship program for undergraduate students, the Pell Grant program, has maintained its focus on awarding aid based on the financial need of the student, funding for it has not kept pace with the increases in tuition prices over the past two decades. Back to text
Donald Heller is associate professor and senior research associate at the Center for the Study of Higher Education at Pennsylvania State University.
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