Merit aid madness: how Ohio colleges started a tuition discount war for wealthy students that has now spread across the country.

• Author: Burd, Stephen

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Although she was a gifted child who devoured books, S. Georgia Nugent never thought she'd be able to go to an elite college. The daughter of a racehorse trainer, she figured that even if she got in, the cost would be prohibitive. "Princeton charged about what my dad made in a year," she remembers.

But as it turned out, Nugent did get to go to Princeton, graduating cum laude in 1973, because the university offered to cover the full cost of her tuition. That life-changing break launched her on a distinguished academic career that culminated in her serving as president of Kenyon College for ten years before stepping down this past June. And it also helps to explain why Nugent now spends much of her time speaking out against a trend in higher education that is making stories of upward mobility like hers less and less common.

"Financial aid available to the lowest-income students has plummeted, and financial aid to the highest has soared," she says. The trend is so powerful that, try as she might, even Nugent herself could not resist it during her presidency at Kenyon. The school found itself engaged in a relentless arms race in which it felt compelled to offer more and more of its financial aid to precisely those students who need it least.

Today, many leaders in higher education would like to break free of the commercial logic that leads to this perverse result. But it can be difficult to escape, especially for schools that lack deep endowments and have to compete hard for revenue. Either a school offers tuition discounts to students from affluent families, or else those students (and the revenue they could provide) wind up going to other institutions that offer similar or more generous discounts.

There is now a whole industry of consultants who will gladly explain the math--not that it is very difficult to grasp. After all, if a school offers a single low-income student a hill scholarship of $20,000, the school may feel good about itself, but it's out $20,000. But if it can attract four affluent students to its campus instead, by offering them each a $5,000 discount off full tuition, it can collect the balance in revenue and come out way ahead financially. Such competitive discounting to the affluent may not be equitable, and it may not be sustainable over the long term, but once the cycle starts it can be very difficult for any one institution to resist unless they all do.

Today, these tuition discounts usually come in the guise of "merit scholarships," but often the students who get them are hardly the best and the brightest. For example, 10 percent of college admissions directors at four-year colleges (and nearly 20 percent of those at private liberal arts colleges) admit that they give affluent students a significant leg up in the admissions process--meaning that they are admitting affluent students with lower grades and test scores than other applicants. Indeed, nearly a fifth of all students receiving so-called merit scholarships have less than a B average, and a largely overlapping 19 percent have only mediocre SAT scores, according to a report by the National Center for Education Statistics.

These colleges are, in other words, providing affirmative action for the wealthy, and the scale has grown very large. During the 1995-96 school year, only 24 percent of first-time, fulltime students at private colleges received merit aid; by the 2007-08 school year that number had risen to 44 percent.

Of course, it's true that all schools would prefer to offer merit aid only to students who are highly accomplished academically. If nothing else, attracting more students with high grade point averages and high SATs helps bolster an institution's ranking on college guides such as those published each year by the US. News & World Report. But such is the competition to boost short-term revenue that so-called merit aid often goes these days to students who have little academic merit.

Adding to the inequity are two related trends. First, the proportion of low-income students who receive financial aid of any kind has continued to fall since the mid-1990s. And moreover, for those who do receive aid, the amount of tuition they must still finance on their own has soared. Indeed, these days the net price paid by low-income students is often as high as, or higher than, that paid by more affluent students at the same institution. Nearly two-thirds of private institutions charge their poorest students (those whose families make $30,000 or less annually) a net price of over $15,000 a year.

This is one reason why even after historic increases in Pell Grant trading, the gap between the percentage of high- and low-income students who go to college remains as wide as ever. Low-income students are paying more and more out of their own pockets while their wealthier counterparts get discounts. There is compelling evidence to suggest that many schools are engaged in an elaborate shell game: using Pell Grants to supplant institutional aid they would otherwise have provided to financially needy students, and then shifting these funds to help recruit wealthier students.

By now, the trend has spread to many public colleges and universities as well and is rapidly getting worse as those institutions struggle with declining support from state governments. In a survey it conducted last year of nearly 600 college admissions directors, Inside Higher Ed found that more than one-third of public colleges and nearly two-thirds of...