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September/ October 2013 Merit Aid Madness

How Ohio colleges started a tuition discount war for wealthy students that has now spread across the country.

By Stephen Burd

The program helped bring Ohio Wesleyan the results it wanted, at least at first. But its early success soon caught the attention of other private colleges in the state and drove them to respond with their own scholarships. As a result, Ohio Wesleyan found that it had to expand its program significantly just to keep pace. By 1994, the school was providing merit aid to 39 percent of its students.

Once the cycle began, it became harder and harder for even schools opposed to merit aid to resist expanding its use. In the 1970s, for example, Denison University, in Granville, Ohio, had flirted with the idea of starting a merit aid program but rejected it on the grounds that it would trigger a bidding war among the colleges for high-achieving students. “Using such scholarships is likely to lead us into a cut-throat competition with other schools to ‘buy’ talent,” Denison’s Admissions and Financial Aid Council wrote in 1977.

By the late 1980s, however, Denison realized that it could not sit on the sidelines any longer as it lost more and more coveted applicants to other colleges that were aggressively awarding non-need-based aid. Denison thus started a relatively modest program that provided small awards to fewer than 10 percent of its students. When that proved insufficient, it doubled the proportion of students the program served, and increased the size of the awards. After nonetheless missing its enrollment targets by several hundred students, the school expanded the program even further in 1994. On the advice of outside consultants, Denison began providing scholarships of up to $5,000 each to students who graduated in the top half of their high school classes and had SAT scores of at least 1050.

This discounting helped Denison to boost its enrollment and net tuition revenue. “You spend money to make money,” a senior member of Denison’s admissions staff told U.S. News in a 1998 article that described the school’s merit aid program. Since then, the discounting has also helped to raise the average SAT scores of Denison’s freshman class by attracting students who might otherwise have gone to better-known, more prestigious schools. But while no one can be categorically against an institution of higher learning lowering its prices to attract talented, paying students, this particular form of price discrimination has broader and longer-term effects.

At Denison, for example, the school’s lowest-income students now must pay an average net price of nearly $19,000 in tuition. Put another way, even though most of these students are receiving Pell Grants from the federal government, Denison is charging them such high tuition and offering them so little need-based aid that most must take on crippling debts to attend. Should Denison really be offering wealthy students discounts even as it pushes up the prices needy students must pay?

There is also the question of how such competitive discounting affects the solvency of higher education as a whole. For some of Denison’s nearby competitors, like Wittenberg University—a 168-year-old liberal arts college located in Springfield, in southwestern Ohio—the consequences of Ohio’s merit aid arms race have been quite damaging. With an endowment that is about a sixth the size of Denison’s, Wittenberg relies much more heavily on tuition revenue to finance its operations than its wealthier rival. But to keep up with the competition, Wittenberg must discount its tuition significantly, leaving the school less to spend in other important areas related to the school’s academic mission. “It’s hard to compete with free,” Laurie Joyner, Wittenberg’s president, told the Springfield News-Sun last year.

The state’s most exclusive schools, Kenyon and Oberlin, held out the longest against joining the merit aid arms race. Both competed most directly with elite liberal arts colleges in the Northeast that had long forsworn merit aid. But even they could not resist the pressure coming from other institutions in the state that were aggressively using merit aid.

Oberlin, with its progressive history and long-held commitment to social justice, was the last to cave. By the early 1990s, the college’s financial fortunes were flagging. The school was spending an increasing share of its budget on need-based financial aid but was having trouble nailing down a class with the quality of students it was seeking. Oberlin found itself admitting more than two-thirds of the students who applied—an unusually high number for a college of its stature.

Administrators there came to the conclusion that their aid practices were not sustainable. “I suspect that for many students our financial aid offers are less attractive than those of other schools—that our financial aid policy may be a primary cause of our loss of market power,” Alfred MacKay, Oberlin’s acting president, wrote in 1991 in an article that ran in a campus publication, entitled “The College May Need to Change Its Strategy.”

It took another two years for the whole campus to come onboard. In late 1993, following months of intense discussions, the faculty governing body signed off on a plan for the college to start using merit aid to pursue the students it most desired. In addition, the school became “need aware,” meaning that it would no longer ignore a student’s ability to pay when offering admissions.

At the end of the decade, Nancy Dye, Oberlin’s then president, argued that the school had to ramp up its merit aid program even further. According to accounts in the student newspaper of the campus-wide discussions that occurred at the time, some faculty members objected. “What I’m afraid of is that we’ll end up providing a discount to wealthy students and end up with the reputation as the type of ‘country club’ school we swore we’d never be,” Gary Kornblith, a history professor, stated during a general faculty meeting on the president’s proposal.

But Dye won the day, in part, by stressing the need for the school to keep up with its rivals. “Colleges like Wooster and Denison are trying to use the current financial aid market as a way of upgrading the quality of students by offering substantial amounts of aid,” she said. “We do compete with them, despite what some people think.”

Meanwhile Kenyon, having held out as long as it could, now finds that not only must it offer substantial aid to affluent students, but these students and their families have come to view such aid as an entitlement. Mid-April is the time of year that Jennifer Delahunty, Kenyon’s dean of admissions and financial aid, dreads the most. That’s because sitting on her desk every April is a very large pile of appeals from students Kenyon has accepted but whose families want the college to at least match the financial aide packages they have received from competing schools. “You know how there was the age of the enlightenment?” the blunt-speaking Delahunty asks. “Well, this is the age of entitlement, in the sense that ‘XYZ school gave me a merit scholarship, why don’t you?’‚ÄČ”

Stephen Burd is a senior policy analyst in the Education Policy Program at the New America Foundation.

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