Baby Steps For Need Based Aid Economics Essay

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Two years ago, when they unveiled the effort at the annual meeting of presidents in the Council of Independent Colleges, dozens of campus leaders expressed enthusiasm for the idea of curtailing the awarding of financial aid based on criteria other than need (commonly known as "merit-based" financial aid). But in the many subsequent conversations that unfolded in the months that followed, as agreement was sought about practical steps that groups of institutions might take, a pattern always emerged.

"Someone raises their hand and says, 'I couldn't go there,' or 'My trustees wouldn't let me do that,' " S. Georgia Nugent, president of Kenyon College and a leader of the effort, said as the Council of Independent Colleges presidents gathered again here on Saturday. "Or another will say, 'The state university will eat my lunch.' And you'd have this progressive stepping back" from the previously expressed enthusiasm.

If Nugent spoke with a hint of frustration in her voice, it was because she so clearly thinks that most presidents know in their hearts that what they're doing isn't in the long-term interests of their institutions or of students.

"The merit wars are both wrong and destructive; is a game of chicken the most responsible way to manage our institutions?" she said. "There's an understandable fear of unilateral disarmament. The question is, can we band together to defend what we think is right?"

As they met at the Council of Independent Colleges' Presidents Institute here, two years later, Nugent and some of her colleagues hoped to generate a bit more of a spark (and a lasting one) than they did last time. And while it'd be foolhardy to predict that they may have, given how the enthusiasm fizzled last time, two developments left participants heartened.

First, Nugent shared with the group a preliminary "statement of principle" (drafted by John McCardell of the University of the South and others) that would represent a "first, baby step" toward reaching some kind of agreement among presidents about eventual actions or changes in financial aid and pricing practices.

And then David L. Warren, president of the National Association of Independent Colleges and Universities, told the group that he'd had a series of preliminary conversations in which officials of the U.S. Justice Department had expressed a willingness to review (and potentially bless) accords in which colleges would agree to take common steps to reduce non-need-based aid that would result either in increased financial aid for students or lowered tuition prices (or both).

A Shift Over 30 Years

There is fairly widespread agreement that the rapid expansion of financial aid awarded based not on financial need but on academic (as well as athletic and racial/ethnic) grounds, and frequently to attract students who are able to afford tuition but whose families won't pay full freight, has undermined the traditional conception of financial aid as a tool to make college possible for students who couldn't otherwise afford it. Aid awarded based on criteria other than need tends to change where people go to college, not make it possible for them to go.

But the arguments against the use of such aid have gained little ground -- not because of disagreement about the agenda (though some exists) but because the competition for students that has driven its use is seen as an unstoppable force, and one that many colleges desperate to attract students will be reluctant to abandon. Officials at private institutions say they must use it to try to compete with the state-subsidized tuitions of public institutions; states have embraced their own merit-based financial aid (like Georgia's Hope Scholarship) to keep high-performing state residents within their borders.

While this phenomenon has taken hold and has been in place for what seems like many years, Nugent and her colleagues -- Tori Haring-Smith of Washington & Jefferson College and Lloyd Thacker of the Education Conservancy - retraced some financial aid and legal history to show that it was not that long ago that virtually all institutional financial aid (as well as state and federal aid) was awarded based solely on students' financial need.

The most significant of those developments was a Justice Department antitrust investigation in the late 1980s that brought to an end the practice in which elite institutions (through a collective called the Overlap Group) reviewed the aid offers they were preparing for commonly admitted students. That collaboration, Haring-Smith said Saturday, "allowed limited financial aid funds to be distributed among the greatest number of students and allowed students to make choices that were not influenced by financial factors," but the Justice Department alleged that it was anti-competitive and hurt students.

The competition that ensued is widely held responsible for stoking the expanded use of merit-based aid (which in most cases is given through the discounting of tuition, rather than with actual grants). While critics of the practice have long hoped for a legal challenge that would once again allow collaboration on financial aid practices, they have often seen that such a challenge might prove impractical or politically unappealing.

The shifts in aid in the last 15-20 years have been unmistakable. In 1995-96, private nonprofit and public four-year colleges were far likelier to give need-based grants than merit-based ones (by margins of 43 vs. 24 percent at private nonprofit colleges and 13 percent vs. 8 percent at public universities). In 2007-8, 18 percent of public university students received merit-based awards and 16 percent received need-based grants; at private colleges, 42 percent received merit aid and 44 percent received need-based assistance, a 2011 study by the National Center for Education Statistics showed.

Turning the Tide

How might the powerful trends of recent years be reversed? The document drafted by McCardell and circulated by Nugent on Saturday offered something of a rhetorical blueprint, at least, in a series of statements that would probably find varying degrees of agreement among presidents.

Entitled "High Tuition/High Discount Has No Future," the document characterizes the merit aid/tuition discounting model as unsustainable, and (importantly in the eyes of advocates for the statement, who want to gain public support) acknowledges that campus presidents themselves have helped to create this problem.

Meeting financial need should be the "highest priority" in awarding aid, the draft statement says, and aid offered to students who do not need it "must not come at the expense of those who do." (The statement relates the results of a 2009 study showing that "the increased use of merit aid is associated with a decrease in enrollment of low-income and minority students, particularly at more selective institutions.")

The statement puts forward a set of principles on which the framers would presumably seek to gain agreement. These are their words:

We will strive, as a matter of policy, to meet full need.

We will give priority, in the allocation of financial aid dollars, to meeting full need.

We will cease, in our publication, on our websites, and in all other forms of admission communication, to use the term "merit aid" to describe non-need-based financial aid (since, they say, all aid recipients are meritorious).

A financial aid offer, once made, will be final, unless a family's economic situation changes.

We will, as a result, show restraint in setting our tuitions.

A Legal Opening

Warren, the NAICU president, stirred those at the session with his news about the conversations with the Justice Department. He said he had to be necessarily vague about those discussions, given their preliminary nature. But he said they had spoken "in considerable detail" about ways in which groups of presidents might "come together with structured proposals" in which their colleges would agree to adopt certain policies or take certain steps on pricing and/or financial that, taken together, would make college more affordable for students.

Federal officials would review the proposals, Warren said, and if they agreed that the accords passed muster, "could issue a letter" that would allow the presidents to "engage in the conversation with no penalty." The idea would be that other groups of colleges would gain the same latitude to share information about their practices that some of the former Overlap Group colleges have through the 568 Presidents Group.

"They made it clear that, like us, they are determined to find a way out of this particular morass," Warren said.

Warren's announcement, together with the standing-room-only attendance at the session and the participants' enthusiasm, left the group in an upbeat mood. Whether that lasts when Nugent begins trying to move the conversations in more tactical directions (requiring presidents to put themselves on the line) in the coming months, or wilts in the face of practical limitations as it did two years ago, will be evident soon enough.

Commentary

Enyu Zhou

University of Missouri

February 2013

In the article "Baby Steps for Need-Based Aid", Doug Lederman (2013) describes a case in which private college presidents push campaign to limit the use of merit-based aid, aiming to increase the need-based aid and lower college cost. He has summarized the shifts in aid from need-based to merit-based in the past decades and the recent discussion about student aid among different stakeholders. The five statements advocated by the merit-based aid opponents are: 1) provide aid to meet the full need, 2) provide need-based aid as priority, 3) limit merit-based aid used as a tool to compete with other institutions, 4) finalize financial aid offer unless a family's economic situation changes, 5) restraint in setting tuitions. The advocates hope that such changes in aid will be useful in increasing college access of low-income and minority students and making college more affordable. The questions underlying their effort are: What are the justifications of need-based and merit-based aid? What are the effects of need-based and merit-based aid?

Trends in Student Aid

In the past decade, the total of grants, loans and aids of higher education has continued to increase. Federal grant aid increased from 32% in 2001-02 to 44% in 2011-12 academic year. Students who receive the Pell Grant increased from $12.7 billion in 2001-02 to $34.5 billion in 2011-12 (Baum& Payea, 2012). With regard to tuition, college net price is increasing over this time period. The average net tuition and fees of public four-year institutions has increased from $1,920 to $2,910, and the average net tuition and fees of private nonprofit four-year institution has increased from $10,010 to $13,380 from 1992-1993 to 2012-2013. From 1999-2010, government aid covered tuition increased from 17% to 18%, however, the student payment to public four-year institutions increased from $4,390 to $6,750 (Baum & Ma, 2012). Although recent reports show that government aid is increasing, college affordability is not.

Need-based Aid

St. John (2003) provides three justifications ftor higher education aid: 1) access for the majority, 2) equal opportunity to enroll, and 3) justice for taxpayers. The justification of higher education finance should be measured by the opportunities of the majority to access college, the enrollment gaps among groups, and the expenditures of tax.

There is indeed a need to support higher education access for the majority. Despite the fact that college enrollment has increased over the last forty years, the enrollment gap between low-income students and high-income students is still high. Low or moderate-income students are more sensitive to tuition change and more concerned about financial aid. The increasing net price of college causes inequality of access to low-income students. Students from low-income families are less likely to be well-prepared for college, more likely to enroll in two-year colleges, and less likely to attain a bachelor degree, compared to the students from high-income families (Advisory Committee on Student Financial Assistance, 2010).

In addition, research on college access shows that there is unequal opportunity to enroll. Some four-year institutions tend to exclude low-performing students to maintain a quality student population. Low-performing students, which usually come from low-income families, are encouraged to go to two-year colleges (Bastedo & Gumport, 2003).

The unequal access to higher education is also caused by the unequal access to credit markets and imperfect information. Although student aid has increased, many aid eligible students still fail to go to college because of the complicated natureof aid application, lack of assistance, and lack of information about financial aid (Long, 2009).

Despite the business features and market behaviors, higher education should be viewed as a public good. First, higher education should be nonprofit due to the risk of uncertain investment for students, especially the low-income students. In addition, higher education institutions have a mission to provide equal access and encourage social justice as nonprofit organizations do (Winston, 1999). All these reasons justify government support to higher education and the significance of need-based aid.

Financial aid programs will increase college enrollments by lowering the tuitions. Heller (1997) did a study of student price response in higher education, finding that student price responses in higher education are tuition sensitive and aid sensitive. Disadvantaged students are more sensitive to tuition andgrants thanhigh-income students. He argues that two-year institutions might have more low-income students who are more sensitive to the changes of tuitions and aid. Moreover, increasing grants, aids or loans will lead to increase of enrollment in higher education. Research shows that $1000 decrease in tuition is associated with 4% increase in enrollment (Deming & Dynarski, 2009).

Merit-based Aid

Since the first merit-based aid Georgia HOPE program was implemented in 1993, many states have started establishing merit-based aid. The justifications of merit-based aid are: 1) provide incentive for high quality students to stay in the state, 2) increase overall enrollments in state, 3) address the equality issue of the need-based aid by providing aid based on merit (Doyle, 2010). The advantage of merit-based aid is accountability, which has a larger return on student performance and changing student behaviors. Other justification is policy diffusion, which states tend to follow trends of other states. Moreover, research finds that the effect of merit-based aid on need-based aid is very small and incremental (Doyle, 2010).

The effect of merit-based aid on college student's academic outcomes is mixed. Research shows that the Georgia Hope program has increased college enrollment by 4-6 percent and lowereds the average cost of attending Georgia institutions. In addition, there is an effect on increasing Black student enrollments in Historically-Black Colleges and Universities (HBCUs) in Georgia (Deming & Dynarski, 2009).

However, critics point out that these results are unreliable. The program effect of Georgia Hope might not generalizable to other states since Georgia has two prestigious public institutions, which help to maintain high quality students in the state. In addition, the increases of Black student enrollment might be due to the large number of HBCUs in Georgia (Cornwell & Mustard, 2004).

Discussion Questions

As a scholar or policy maker, how could you work further to increase college access?

Despite the increasing federal aid to help low-income students seeking access to higher education, the imperfect information about financial aid and college availability is still a barrier for them to make college decisions (Long, 2009). In 2012, President Obama proposed a new plan to provide better information and tools for students to choose college, including college scorecard, financial aid shopping sheet, and collecting earnings and employment information (The White House, 2012).

I think that higher education policy should be more focused on four areas. First, improve the ways of disseminating information on financial aid. Simplify the federal aid application process and provide more assistance on aid application (Dynarski & Scott-Clayton, 2007). Second, continue to maintain or increase the funding on need-based aid rather than moving towards merit-based. Third, reduce the financial barriers of transferring from two-year colleges to four-year institutions (Advisory Committee on Student Financial Assistance, 2010). Fourth, combine financial aid with services to increase college retention and persistence (Deming & Dynarski, 2009).

What is the trade-off when implementing either merit-based or need-based aid?

Efficiency and equity are two important goals in public policy decision-making. Stone (2012) points out that there is paradox to define efficiency and equity and the definitions are different by who, when and how to frame them. She defines efficiency as maximizing benefit by the lowest cost, and equity as everyone having the same benefit. According to her, equity can be defined by many ways such as merit, rank, value and lottery, and it is impossible to be equal to everyone.

However, DesJardins (2002) argues that the definition of equity should also consider moral and social justice. Applying to higher education, equity should not only include equal access opportunity, but also equal ability to access for those who want to go to college but cannot afford it. At this point, it justifies the government support of higher education access and subsidy for low-income students.

Need-based aid can help with the upward mobility of minorities and low-income students. It can also help to increase college retention, increase educated workforce, and maximize social net benefit. Based on DesJardins's argument, need-based aid can be both efficient and equitable. It's efficient because it maximizes social benefit. It is equitable since it provides equal ability for everyone who wants to go to college.

What is the criticism of need-based theory?

Inefficiency of tax utilization is one of the criticisms of need-based aid. Vedder (2004) argues that it's a waste of tax money to subsidize those people who cannot graduate from college. The positive externality of higher education might not exit. Another argument is that it is inequitable to get tax money from the rich and give it to the poor.

People might argue that merit-based aid is both more efficient and more equitable. It is efficient because it provides incentives to increase student performance and award those who work hard. It is equitable because every student is eligible to get it as long as they meet the grade requirement, compared to need-base aid, in which only low-income students are eligible.

I think this depends on how much inefficiency we are willing to bear to achieve the goal. What goals do we care about: equity, efficiency, quality, responsiveness, or democracy? And how do we measure these goals?

Do you think we are over-educated people?

Based on the simple economic theory, education is underinvested because public good is a feature of education. Therefore, it is necessary for government to intervene and subsidize education to increase the overall consumption of it. Based on the equal opportunity theory, government should provide everyone a chance to access higher education (St John, 2003). Even though we would waste some money providing people with education theydo not need, government should subsidize higher education.

Being able to access and succeed in higher education depends on academic performance, which is more correlated with income, preparation, and backgrounds. Students from disadvantaged backgrounds are more vulnerable. Need-based aid can provide a chance for disadvantaged students to overcome structural barriers and inequality though acquiring the education and skills in higher education.

References and Suggested Readings

Advisory Committee on Student Financial Assistance. (2010) The rising price of inequality: How inadequate grant aid limits college access and persistence. Report to Congress and the Secretary of Education.

Baum, S., & Payea, K. (2012). Trends in Student Aid, 2012. New York, NY: The College Board

Baum, S., & Ma, J. (2012). Trends in College Pricing, 2012. New York, NY: The College Board

Bastedo, M.N. & Gumport, P.J. (2003). Access to what? Mission differentiation and academic stratification in US public higher education. Higher Education, 46, 341-359.

Cornwell, C., & Mustard, D. B. (2004). Georgia's HOPE scholarship and minority and low-income students: Program effects and proposed reforms. In D. E. Heller & P. Marin (Eds.), State merit scholarship programs and racial inequality. Cambridge, MA: The Civil Rights Project.

Deming, D. & Dynarski, S. (2009). "Into College, Out of Poverty? Policies to Increase the Postsecondary Attainment of the Poor." NBER Working Paper No. 15387.

DesJardins, S. L. (2002). Understanding and using efficiency and equity criteria in the study of higher education policy. In J. C. Smart, (Ed.), Higher education: Handbook of theory and research: Vol. XVII. New York, NY: Springer.

Doyle, W.R. (2010). Does merit-based aid "crowd out" need based aid? Research in Higher Education, 51(5), 397-415.

Dynarski, S. M.,& Scott-Clayton, J. E. (2007). The feasibility of streamlining aid for college using the tax system. Proceedings of the National Tax Association, 99. Retrieved from http://www.ntanet.org/publications/nta-proceedings/122.html

Heller, D. E. (1997). Student Price Response in higher education:  An update of Leslie and Brinkman. Journal of Higher Education, 68, 624-659. 

Long, B. T. (2009). Breaking the affordability barrier: How much of the college access problem is attributable to lack of information about financial aid?" National CrossTalk. San Jose, CA: The National Center for Public Policy and Higher Education.

St. John, E.P. (2003). Refinancing the College Dream: Access, Equal Opportunity, and Justice for Taxpayers. Baltimore, MD: Johns Hopkins University Press.

Stone, D. (2002). Policy Paradox: The Art of Political Decision Making. New York, NY: WW Norton.

The White House. (n.d.). FACT SHEET: President Obama's Blueprint for Keeping College Affordable and Within Reach for All Americans. Retrieved February 14, 2013, from http://www.whitehouse.gov/the-press-office/2012/01/27/fact-sheet-president-obama-s-blueprint-keeping-college-affordable-and-wi

Vedder, R. K. (2004). Going Broke by Degree: Why College Costs Too Much. American Enterprise Institute.

Winston, G.C. (1999). Subsidies, hierarchy, and peers: The awkward economics of higher education. Journal of Economic Perspectives, 13(1), 13-36.

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