Merit-based college financial aid criticized as 'Freebies for the Rich'

In the New York Times, Catherine Rampell argues against the trend of state universities shifting more of their financial aid from need-based to merit-based.

'Freebies for the Rich'

Over the years, many state-university systems — and even states themselves — have shifted more of their financial aid away from students who need it toward those whose résumés merit it. The share of state aid that’s not based on need has nearly tripled in the last two decades, to 29 percent per full-time student in 2010-11. The stated rationale, of course, is that merit scholarships motivate high-school achievement and keep talented students in state. The consequence, however, is that more aid is helping kids who need it less. Merit metrics like SAT scores tend to closely correlate with family income; about 1 in 5 students from households with income over $250,000 receives merit aid from his or her school. For families making less than $30,000, it’s 1 in 10.

Schools are doing this because the math works out for them and because it helps their rankings.

Raising the tuition and then offering a 25 percent scholarship to four wealthier kids who might otherwise have gone to private school generates more revenue than giving a free ride to one who truly needs it. Incidentally, enticing these students also helps boost a school’s rankings....

According to Rampell, it's bad for the economy, bad for the merit aid recipients, and bad for needy students.

This is obviously troubling for the students who need help, but it is also bad for the state economies that public colleges are supported by and are supposed to help advance. While merit aid sounds like an effective way to combat brain drain, there is no conclusive evidence that it works. One recent study by economists at Cornell and the University of Chicago found that “nearly all” of the spending on state merit-based scholarships had little effect on keeping students in state after they graduated. Merit aid may not even be a good deal for those who earn it. A recent study by researchers at Harvard Kennedy School looked at a scholarship program in Massachusetts in which high-scoring students get tuition waivers at in-state public colleges. It found that taking the scholarship actually reduced a student’s likelihood of graduating because they ended up at a school with a completion rate lower than one of the other schools they could have gone to. Peer effects matter, it turns out. The long-term costs of going to school among those who are more likely to drop out could outweigh the upfront benefits of a cheap education.

But if the high achievers did not accept merit aid, where would they go to college?  I don't think it can be assumed that they could afford the higher-ranked, higher-priced schools.

This NYT editorial is part of the ongoing debate on the trend of awarding increasingly more college financial aid based on merit, with some college presidents taking steps to reverse the trend amid criticism that merit aid is unfair.

(A version of this post previously appeared on Cost of College blog.)