Introduction

From 2001–2017, public four-year universities spent at least $32 billion of their own financial aid dollars on students who lack financial need, according to an analysis New America conducted looking at how these institutions have been spending their own institutional aid dollars since the beginning of the 21st century. About $2 out of every $5 of aid public universities provided went to non-needy students—those whom the federal government deems able to afford college without financial aid.

Since 2001, public universities’ use of non–need-based aid to recruit relatively affluent students has skyrocketed. At that time, the 339 public universities examined in this paper spent about $1 billion annually on so-called “merit aid” for well-off students. By 2016–2017, these schools were spending nearly $3 billion yearly on financial aid to students who lacked financial need. (All dollar amounts in this paper are adjusted for inflation to 2017 values.)

In 2001, the top spender was the University of Texas at Austin, which awarded about $44 million in non–need-based aid to students, after adjusting for inflation. Today, the University of Alabama leads the pack, devoting more than $136 million of its financial aid budget to relatively affluent students.

The pace of public universities’ spending on non–need-based aid has significantly accelerated in recent years. Since 2014, the growth in merit aid for non-needy students has outpaced increases in spending on need-based aid at these institutions, making it more and more difficult for low-income and other financially needy students to attend these colleges and earn degrees.

It may seem odd at first glance that public universities have been so bountiful to students who are not financially needy, especially during a time period when states divested heavily from these institutions. With more-limited state funding per student, you might think that these institutions would provide aid only to those who truly need it.¹

But while such a reaction makes sense, it does not take into account the dramatic transformation that has occurred in the admissions and financial aid practices at many public four-year colleges and universities since the 1990s. The overwhelming beneficiaries of this shift have been students from upper-middle-income and wealthy families.²

For generations, public colleges and universities, with the help of the federal government and states, provided a low-cost higher education to students in their home states. By keeping their prices low, these schools offered students from low-income and moderate-income families a gateway to the middle class.

But over the last 25 years, state disinvestment and institutional status-seeking have worked together, hand in hand, to encourage many public colleges and universities to adopt the “enrollment management” tactics of their private college counterparts. With the help of high-priced consultants from enrollment management firms such as Ruffalo Noel Levitz and EAB, many of these schools have hiked up their prices and provided tuition discounts to lure affluent out-of-state students with decent standardized test scores to their campuses in order to climb up the rankings and increase their revenue.³ These institutions have also provided so-called merit scholarships to the “best and brightest” in-state students, who tend to come from privileged families, in order to prevent public universities in other states from luring them away with generous scholarship offers.⁴

The more public universities engage in these practices, the harder it gets for others to resist for fear of putting themselves at a competitive disadvantage. As a result, schools that provide generous amounts of non–need-based aid cannot rest easy. They have to keep ratcheting up their scholarships or discounts to try to stay ahead of their competition, creating an ever-expanding arms race.⁵

Our analysis shows this “merit-aid” arms race at work. For example, from 2001 to 2017:

• More than half of the 339 public universities (177 schools) doubled the amount they spent on non–need-based aid, after adjusting for inflation; more than a quarter (92) quadrupled the amount; and about 10 percent (33 schools) raised it by more than 10 times.
• More than a quarter (92 schools) increased the amount they spent on non–need-based aid by $5 million or more, and about a fifth of those institutions (21) boosted their aid spending for non-needy students by $25 million or more.
• The number of schools that spent an inflation-adjusted $10 million or more on non–need-based aid to well-off students more than tripled, from 29 to 89; and the number that spent more than $20 million jumped six-fold, from 7 to 44. While only one school spent more than $40 million in 2001, 11 did so in 2017, with 10 spending more than $50 million and 4 spending more than $75 million.
• Public flagship and research universities were not the only institutions using a substantial share of their institutional aid dollars to recruit students without financial need. Regional state colleges actually devote an even larger share of their institutional aid dollars to non-needy students than do their more elite and better-resourced counterparts.

It is important to note that during this 17-year period, public universities’ annual spending on both need-based aid and non–need-based aid soared. The total amount the 339 schools gave out in institutional aid increased from approximately $2 billion in 2001 to about $8.6 billion in 2017. These increases in aid overall at these institutions came at a time when enrollment at public four year colleges grew substantially, from 4.8 million to 6.2 million students, although the pace of growth slowed considerably by the end of the period.

Some readers may take comfort in these figures, suggesting that fears of the merit-aid arms race at public universities are overstated.⁶ But that interpretation is mistaken.

First, while there are certainly still many public universities that have not embraced enrollment management and are continuing to devote their aid dollars primarily to meeting students’ financial need, their numbers are shrinking. The bulk of these institutions are heavily concentrated in a relatively small number of states, mostly on the coasts. And these schools are coming under tremendous pressure to change their ways to keep up with competitors that are trying to poach their best students away with generous merit scholarship offers.⁷

Second, the increasing number of public universities that are engaged in enrollment management engage in “financial aid leveraging” — using all of their institutional aid to achieve their strategic purposes. A chief goal of enrollment managers is to determine the precise price point they need to offer to enroll different groups of students and not provide a dollar more. Therefore, using financial aid to meet students’ full need is considered wasteful and inefficient. The best financial-aid packages go to the students they want the most.

All of this is to say that a significant amount of the money that is counted in these data as “need-based aid” is actually merit aid that went to financial needy students.⁸ These funds may be helpful to these students, but they are not awarded with the goal of meeting their need. Under enrollment management, leaving financially needy students with “unmet need” is part of the game plan to ensure there is enough money to pursue the students who will help them raise their rankings and boost their institutions’ bottom line.⁹ And, in fact, the average amount of financial need that the 339 public universities covered of their financial aid recipients dropped six percentage points over the 17-year period, from 72 percent in 2000–2001 to 66 percent in 2016–2017. Nearly half of the schools now cover less than two-thirds of their students' financial need, and one-in-five cover less than 55 percent.

Third, there is plenty of evidence to suggest that the transition that public universities have made from being “low-cost, low aid” to being “high-cost, high aid” has been extremely detrimental for low-income and working-class students.

For example, data that the nonprofit Equality of Opportunity Project released in 2017 looking at social mobility in higher education showed that the majority of public universities have become less accessible than they were in the 1990s.¹⁰ A New America analysis of that data found that nearly two-thirds of selective public universities have reduced the share of students they enroll from families in the bottom 40 percent of the income scale since that time. At the same time, these schools have increased the share of students they enroll from the top 20 percent.¹¹

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. 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.¹²

Meanwhile, New America’s Undermining Pell series has shown that public universities are generally becoming less affordable for low-income students. Over the course of four reports, the series found that the share of public universities that expected students from families making $30,000 or less to pay an average net price—the amount that students and families owe after all grant and scholarship aid is taken into account—of over $10,000 annually has grown steadily this decade.¹³ In 2010–2011, 34 percent of the public institutions examined charged the lowest income students more than $10,000, which equals more than a third of their families’ yearly income.¹⁴ By 2015–2016, more than half of the institutions (52 percent) did.¹⁵

The findings in this report are consistent with those results. The data suggest that public universities that predominantly use their institutional aid to provide scholarships or discounts to relatively affluent students tend to leave financially needy students with substantially larger funding gaps than those that primarily use their aid to meet need. For example, schools that spent 90 percent or more of their institutional aid on merit aid for well-off students in 2016–2017 met, on average, only 58 percent of the need of student aid recipients on their campuses. That is compared with 70 percent for schools that spent 10 percent or less of their aid budgets on so-called merit aid.

Colleges that leave low-income and working-class students with large funding gaps add hurdles that often stymie the educational progress of these students.¹⁶ Many students feel they have no choice but to work long hours at jobs off campus, making it more difficult for them to get to their classes and complete their assignments. Some choose to attend part-time, and others may “stop out,” leaving school with the hope they will return at some future point. Most who remain in school have to take on large amounts of debt to fill the gaps, including risky private loans that tend to come with higher interest rates and fewer consumer protections than federal loans.

Given those realities, it is not too surprising that the data suggest that a substantially larger share of students take out student loans at schools that spend their aid primarily on non-needy students than at those that devote most of their aid to meeting financial need, and they take out far heavier debt loads. In 2016–2017, for instance, an average of 69 percent of seniors graduated with an average debt load of $27,893 at schools that devoted 90 percent or more of their aid to non-needy students. In contrast, an average of 55 percent of seniors graduated with an average debt load of $22,214 at schools that spent 10 percent or less of their aid budgets on non-needy students that school year.

The growing merit-aid arms race at public universities has been harmful to the college aspirations of low-income and working-class students, making it harder and harder for them to gain access and be successful in earning a degree. At a time of ever-growing inequality in this country, it is absolutely crucial to put an end to the arms race before more public universities are swept up in it.

A few public institutions, such as the University of Kentucky¹⁷ and more recently the University of Pittsburgh¹⁸, have recognized how harmful these policies have been and are reversing course, providing greater amounts of need-based aid. But they are few and far between. Instead, public universities are under intense pressure to keep ratcheting up their merit-aid offerings.

It is clear that federal intervention is needed to refocus colleges on using financial aid for its original purpose: meeting the financial need of students who truly need the help. Colleges that continue to undermine the federal government’s mission of helping low-income students gain access to college must pay a heavy price—the loss of much-coveted federal campus-based aid dollars. But those that improve and substantially increase the average amount of financial need they meet should be rewarded with more generous funding.

For the good of the country, federal policymakers must step in to ensure that colleges live up to their commitments by serving as engines of opportunity, rather than perpetuating inequality.