Beyond ‘Need’ and ‘Merit’

Federal financial aid for college students is frequently in the headlines, but the student grants provided by state governments receive less attention.  In recent years, the grants have grown in importance as tuitions have increased and state appropriations for public colleges and universities, which allow these institutions to subsidize the tuition of all in-state students, have declined. Policies vary widely across states, but state grant aid – which provides subsidies to selected students -- has increased to about $9.2 billion in 2010-11.

In our new report, “Beyond Need and Merit: Strengthening State Grant Programs” (co-authored with the other members of a Brookings Institution study group), we urge states to re-examine their state grant programs to more effectively support the goal of increasing educational attainment.

We propose moving away from the dichotomy between “need-based” and “merit-based” aid and instead designing programs that direct aid to students with financial need with appropriate expectations and support for college success.  Too many existing grant programs exclude the students who need them most by rewarding past academic accomplishments. Our goal is to improve the performance of students facing financial and academic challenges.  

Some states ignore financial circumstances in allocating all or most of their grant funds, providing expensive subsidies to many students who would enroll and succeed in college without this assistance.

Other states do target low-income students, but frequently have complex allocation formulas that increase administrative costs and reduce student understanding of the system. The incentives embodied in aid programs for low- and moderate-income students are rarely carefully designed to support academic progress.  Too many state grant programs exclude students without stellar high school records. Not enough provide simple, attainable guidelines for accumulating the credits necessary to graduate.

The recommendations in our report, which was funded by the Lumina Foundation, fall into three categories: targeting, simplification, and incentivizing success. 

First, states should do a better job of targeting aid dollars at students whose potential to succeed is most constrained by limited resources.  These students are most likely to be affected by state grant awards -- in terms of both their ability to attend college and the likelihood that they will graduate.

Second, states should consolidate programs to make the system simpler and easier for prospective students and their families to understand and navigate. Programs can be better targeted but still relatively simple. Look-up tables like those that would base grant eligibility only on income and family size might serve as a model.  In the same spirit, net price calculators that students can use to estimate the cost of attendance at every public institution in the state would be a valuable supplement to the calculators each individual institution is now required by federal law to post on its website. There is strong evidence that complexity reduces the effectiveness of grant programs. The federal government has begun to simplify the financial aid application process and efforts are under way to move further in that direction, possibly reducing the amount of information collected to determine student and family ability to pay. States should welcome federal simplification efforts and should resist any temptation to ask for additional data -- restoring complication even as the federal government reduces it.

Third, state grant programs should encourage on-time degree attainment by rewarding concrete accomplishments such as the completion of credit hours. Academic requirements embodied in state grant programs should provide meaningful incentives for success in college; they should not be focused exclusively on past achievement or be so high as to exclude students on the margin of college access and success. States should provide second chances for students who lose funding because they do not meet targets the first time around.

Many states have been forced to ration funds to balance their budgets. There may be no good options under these circumstances, but some choices are worse than others. An increasing number of states are adopting “first-come, first-served” models, providing assistance to those who apply early and denying aid to eligible students who apply after the money has run out.  Instead, states under pressure to cut spending quickly could lower income limits; cut grants for all recipients, with the neediest students losing the least; or build more incentives for college completion into their programs.

Financial aid alone cannot bring educational attainment to its desired level or close the troubling disparities in outcomes between disadvantaged students and their more affluent peers. And encouraging students to complete more credit hours will not solve the time-to-degree problems at institutions that face capacity problems and do not provide access to the courses students require.

But state grant programs are among a limited set of policy levers available to lawmakers. These programs should be designed to use taxpayer dollars as effectively as possible to increase the educational opportunities and attainment levels of state residents. They should be viewed as part of an integrated system of higher education funding including appropriations for operating expenditures, tuition setting, and student aid.

States should use this time of financial exigency to carefully evaluate the effectiveness of existing grant programs and to put in place systems for periodic review of these programs. Last-minute budget slashing efforts have the potential to do serious damage to the states’ students, colleges and universities, and long-run economic health. Careful planning, program design, and monitoring can increase the effectiveness of vital state grant programs and maximize the impact of taxpayer dollars.