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Why Colleges Give Aid So Much Aid to Wealthy Students

David Callahan

Let's say you're president of a presitigous liberal arts college with a nice endowment and you have enough money to give out a decent level of financial aid every year. How do you deploy that aid? Do you a) focus it on smart lower income kids who wouldn't be able to come to your college without aid? Or do you b) focus the money on even smarter affluent kids whose parents have plenty of money to pay full freight? Or even on rich kids who are less smart than poorer applicants? 

The answer to this question might seem obvious: You target the aid on smart poor kids. After all, what's the point of wasting your financial aid on students who don't need it?

Twenty years this is pretty much what colleges did. In the mid-1990s, "both public and private four-year colleges and universities predominantly used their institutional aid resources to try to meet the financial need of their students," according to a new study by Stephen Burd of the New America Foundation. So-called "merit aid" -- used to lure attractive students who don't have financial needs -- was given out far less than financial aid.

Today, everything is different. Now, private colleges give out merit aid to as many students as get financial aid. Why? For two reason, both of which tell a sad story about how higher education is helping to widen the class chasm in America rather than to close it. 

First, colleges are obsessed with their U.S. News rankings, as we've all heard a million times. They want to recruit the students with the highest SAT scores and GPAs possible in order to help their U.S. News ranking, and offering merit aid is a chief way to get these students. The problem here is that many of these bright students are also affluent ones: the kids who've gone to the best public and private schools, who took the SAT prep courses, and who don't actually need any financial help going to college because they come from the top 10 percent of households who've done extremely well in the past decade or two. 

So in case you were looking for yet more evidence that the U.S. News rankings were evil, this report provides it. 

But there's a second reason that colleges throw merit aid at rich kids. And that's because, as the report explains, colleges are:

working hard to bring wealthy students to their campuses in order to maximize their revenue. The schools generally try to achieve this goal by offering generous institutional aid awards to these otherwise “full-pay” students — that is, students whose families can afford to pay advertised tuition rates. After all, it’s more profitable for schools to provide four scholarships of $5,000 each to induce affluent students who will be able to pay the balance than it is to provide a single $20,000 grant to one low-income student. 

And why are colleges so desperate to maximize their revenue? One reason is the cuts to higher education, which are squeezing public universities as never before. A second is that many private schools have financially overextended themselves in recent years with infrastructure projects, fat salaries for start administrators and professors, and much-criticized spending on amenities that they say are necessary to recruit students. Meanwhile, the financial downturn delivered a huge hit to endowments that schools are still recovering from. 

All this is a bad news for low-income students and the broader cause of social equity. The report concludes:

our country’s four-year colleges and universities are backing away from the commitment they forged with the federal government nearly 50 years ago to remove the financial barriers that prevent low-income and working-class students from enrolling in and completing college. This retrenchment is nearly complete in the private nonprofit college sector, where only a few dozen schools enroll a substantial share of low-income students and charge them low net prices.