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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

In the view of the U.S. Department of Justice, however, these discussions had a much different purpose: price fixing. In 1991, the Justice Department filed a lawsuit against the members of the Overlap Group, charging that they had violated the Sherman Antitrust Act “by illegally conspiring to restrain price competition for financial aid” to prospective students. To get the Justice Department to drop its suit, the eight Ivy League colleges quickly capitulated, signing a consent decree in which they agreed to end their discussions. (MIT, which was the only school to fight the lawsuit, eventually reached its own settlement with the government.) The Ivy League’s action convinced other private college groups to disband as well.

In 1994, former members of the Overlap Group persuaded Congress to pass a bill allowing certain private colleges to hold meetings to discuss general institutional aid policies and to refine the formula the institutions use for measuring a student’s need. The schools are forbidden, however, from negotiating individual students’ aid awards. And participation in these discussions is limited to a small and ever-shrinking number of colleges: those that are completely “need blind,” meaning that they never take a family’s income into consideration when admitting students.

Nugent and the other private college presidents with whom she’s working argue that Congress must revise the law to allow a much wider group of institutions to participate in these types of discussions. “Allowing conversation about financial aid priorities and policies among schools could catalyze the creation of a better system,” says Tori Haring-Smith, the president of Washington & Jefferson College in Pennsylvania, who has been actively involved in the campaign.

But even if a much greater number of colleges were given the opportunity to work together to try to stem the merit aid arms race, would they want to?

The signs are not encouraging. A recent survey by Inside Higher Ed asked 841 college presidents whether “they would eliminate non-need-based aid if their competitors also agreed to do so.” The results: only a quarter of the respondents agreed or strongly agreed with the idea, while nearly 60 percent made clear that they are not interested in changing their practices.

At the very least, we should consider whether so-called merit aid is a form of price discrimination that ought to be illegal, since it is both unfair and inefficient. While it may help some individual schools to maximize their own revenues or attract more desirable students at the expense of other institutions, it does nothing to improve either the quality or the financing of higher education as a whole and may well make both worse. When a kid is lured from going to Oberlin to going to Denison by a $5,000 “merit” scholarship, that does not make him or her more or less meritorious. Nor does it change in any obvious way how well such a student will do in college or life. But that $5,000 cannot now be spent on another student who, though he or she may have higher grades and scores, cannot afford to go to either school, or perhaps to any school at all. Meanwhile, if both Oberlin and Denison, and a lot of other fine schools like them, go broke by engaging in competitive cycles of discounting to wealthy students, how does that serve any social purpose?

Short of banning the practice of offering the biggest tuition discounts to those best able to pay, the federal government needs to scrutinize institutions that both enroll few low-income students and charge them high net prices. To prevent such institutions from using public dollars as a substitute for offering their own aid to financially needy students, or as a means of financing discounts for affluent students, they should be required to match at least a share of the Pell dollars they receive.

At the same time, however, we can’t lose sight of the root cause of the problem. Between stagnating or declining real wages and relentlessly rising tuition costs, an ever-rising share of the population, including most of the middle class, requires financial assistance to have equal access to higher education. Getting a $5,000 discount on a $40,000 tuition bill hardly leaves most middle-class families able to afford college without taking on debts they should not, and is all the more cruel when the list price has been inflated by $5,000 just as a sales gimmick.

The explosion of student debt that occurred over the last generation masked the problem for a while, but has proved unsustainable. A large part of the answer (much easier said than done, of course) is to drive down tuition costs through improvements in efficiency. But we cannot pretend that it is possible to reverse the growing trend toward inequality and diminished upward mobility as long as more and more institutions of higher learning, including public universities, face a growing imperative to maximize tuition revenues at the expense of other values.

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

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