Let’s Finally Cap Merit Aid

“We need the federal government to put a cap on merit aid,” I said nervously to a representative from the newly formed Consumer Financial Protection Bureau. Why I said that, and his response, highlight one of the challenges that will endure well after the coronavirus: ever-rising tuition discount rates.

Backing up, it’s worth noting the time that this conversation occurred. It was 2010, and according to National Association of College and University Business Officers, the average discount rate had just smashed through the 40 percent threshold, which had previously seemed inconceivable. Policy makers and the public were asking colleges and universities the same questions we’ve been handling for the entire decade since: “How can you justify the ever-increasing cost of college?”

Of course, the answer is that we can’t -- which is why we keep ratcheting up the discount rate. Each of us individually knows that the system is not working, that families are scared off by the price tag, that we’ve created a financial aid structure that primarily benefits the wealthy and well connected with the resources to maximize their gift aid.

Yet none of us can individually do what we know needs to be done: slow or even reduce the amount of non-need-based aid we give to students. If we do, our competitor colleges and universities will happily enroll the high-achieving students -- as judged by test scores and GPA, each with their own challenges -- while we have to explain declining enrollments, lower profiles and a drop in net revenue and rankings.

We also can’t band together, as is sometimes suggested. Even if it were possible to get all of the colleges and universities in a particular region or selectivity band to agree to a more rational financial aid process, we’d be left with two major problems. First, institutions outside of that band or region would again happily swoop in and enroll students. Second, the U.S. Department of Justice would probably not smile on this practice.

That is why we need a new regulation: any college or university that accepts Title IV funds can offer no more than 25 percent of their tuition as a merit-based scholarship. Anything else must strictly be based on the student’s demonstrated need.

Now, before all the angry emails come, please know I’m just as worn out by the increase in federal regulations as anyone else. But this is one that would actually help us through a serious problem, providing solutions that we can’t get to on our own.

Here is what would happen in this dream scenario:

• Colleges would be able to free up institutional dollars for need-based aid, allowing us to close yawning gaps for low- and middle-income families.
• The “can you match this?” game would come to a halt. Instead, responses to any aid appeals would be based on the professional judgment of financial aid professionals.
• Families would stop putting undue pressure on the wrong things, starting with standardized tests for the sake of obtaining college financial aid.
• At long last, the sticker price and net price would be connected. If we can no longer discount the highest-achieving students well beyond their need, we’ll have to be much more responsive to the market demands and students and families’ willingness to pay than we are now.

Is it perfect? Of course not. Will we see winners and losers? Just as with any public policy, of course we will. But this construct would have a net positive effect on colleges, students, higher education generally and, by extension, society as a whole.

So when I attended the Legislative Action Day in 2010 and shared my idea with a new staffer at the CFPB, I was eager to see how this idea would set into motion the regulatory and legislative machinations of change. What I got was just a bit different and highlights the biggest barrier to a policy like this: we have led families to believe that these aren’t discounts we are offering to generate revenue, but something they’ve earned by nature of their parenting and thus are entitled to.

Looking back at me with confusion, he responded, “But a lot of middle-class families worked hard to earn those scholarships to afford college.”

Of course, I realized in that moment that he himself was probably “awarded a prestigious scholarship” not because his college had modeling to suggest the level of discount needed to maximize the enrollment of students in his financial and academic tiers, but rather because of the community service he reported during his sophomore year of high school.

It’s an uphill climb, and it’s one of our own making. But until an outside entity can compel us to collectively limit this practice, we’ll continue to repeat this cycle. After all, it was just eight years after this conversation that we collectively crashed through the 50 percent discount rate.