Merit vs. Need-Based Aid: What the Research Says

Blog Post
May 27, 2013

[The New America Foundation's Education Policy Program recently released "Undermining Pell: How Colleges Compete for Wealthy Students and Leave the Low-Income Behind," a report that presents a new analysis of little-examined U.S. Department of Education data showing the "net price" – the amount students pay after all grant aid has been exhausted – for low-income students at individual colleges. This is the sixth in a series of posts related to the report's findings. Read earlier parts of the series here, here, here, here, and here.]

No one would dispute that there has been enormous growth in the use of non-need-based aid at the nation’s public and private four-year colleges and universities. But there has been a debate over whether this trend is good or bad for low-income students. Some proponents of enrollment management have argued that colleges are using so-called merit aid to increase the revenues they have to spend on need-based aid. While this may be true at individual colleges, research shows that the increasing availability of merit aid has largely come at the expense of low-income students.

Here are some studies that look at the relationship between these two types of aid:

This study, conducted by researchers at the Cornell Higher Education Research Institute, looked at the proportion of Pell Grant recipients at colleges that fund a large number of National Merit Scholarships (NMS) and found an inverse relationship between the two. Schools that increase the share of National Merit Scholars they support tend to reduce the share of Pell Grant recipients they serve.

“While our research has focused only on NMS awards, it highlights the tradeoff that may exist more broadly between using institutional grant aid to craft a more selective student body than would otherwise occur and using institutional grant aid to attract more students from families from the lower tail of the family income distribution,” the study’s authors wrote.

Using merit aid data from the College Board’s “Annual Survey of Colleges,” this study looked at demographic changes that occurred at 93 private nonprofit colleges that began offering non-need-based financial aid between 1987 and 2005.

Griffith, an assistant professor of economics at Wake Forest University, found that “the use of merit aid is associated with changes in the socioeconomic and racial composition of the study body.” According to the report, within three to five years of introducing a merit aid program, the two top tiers of private colleges saw their share of Pell Grant recipients fall by 6 percentage points. At bottom-tier schools, the proportion of Pell Grant recipients initially rose but ultimately dropped by 2 percentage points within 10 years of the creation of such a program. The study also found that the introduction of a merit aid program led to a reduction in the representation of black students at top-tier schools.

“It is worrisome, given the already low levels of representation of low-income and minority students at four-year colleges, to find that the introduction of a merit aid policy is associated with a decrease in the percentage of low-income and black students, particularly at the more selective institutions in the sample.”

Doyle, an assistant professor of higher education at Vanderbilt University, analyzed data from the U.S. Department of Education’s National Postsecondary Student Aid Survey (NPSAS) from 1992 to 2003 to see whether colleges’ priorities in awarding institutional financial aid dollars had changed during this time period. He looked particularly at colleges’ responsiveness to student need and standardized test scores at public four-year doctoral institutions, public four-year non-doctoral institutions, private four–year doctoral institutions, and private four-year non-doctoral institutions.

He found significant changes in three out of the four types of schools he examined. “At public non-doctoral institutions and at all types of privates, the payoff for academic characteristics has grown dramatically, while the increase in need-based aid has not grown nearly as fast,” he wrote.

This shift is alarming, he stated, because “the increased expenditure on merit-based aid by institutions means that resources at these institutions are being spent on where, and not whether, a student goes to college.”

  • “A Natural Experiment of the 1990s: Responses to Changes in Pell Grants and Stafford Loans” — by Jon H. Oberg

Using NPSAS data, Oberg, a U.S. Department of Education researcher at the time, examined how colleges responded to changes in Pell Grant funding during the 1990s. He found that while colleges increased institutional aid to low-income students when Pell Grant funding was cut in the middle of the decade, they reacted to increases in the program’s funding in the late 1990s by steering their aid to middle- and high-income students. As a result, Pell Grant increases did not result in any slowdown in the rate of student loan borrowing by low-income students, but they did so for middle-income students.

“The study demonstrates that, for many low-income dependent students, current student federal and institutional student financial aid programs often countervail each other and therefore miss opportunities to close the college opportunity gap that exists between low and higher income students,” Oberg wrote.