Financial Aid for Whom?

"Scholarships: Need or Merit?" by Herschel Grossman, in Cato Journal (Winter 1995), Cato Institute, 1000 Massachusetts Ave. N.W., Washington, D.C. 20001–5403.

Professional baseball’s exemption from federal antitrust laws has sparked controversy for years, but when America’s colleges and universities received a similar exemption two years ago, hardly anybody noticed. Students, argues Grossman, a Brown University economist, are being short-changed.

For decades, he notes, Brown and the seven other Ivy League schools joined with the Massachusetts Institute of Technology in "a cartel to limit competition for desirable undergraduate students." The institutions agreed to award scholarships on the basis of "need," not "merit." (And they defined need in a narrow way.) At an annual meeting called "Overlap," representatives of the universities even jointly decided on how much aid they would offer to specific individual applicants. By not awarding "merit" scholarships, Grossman maintains, the institutions avoided costly bidding wars over talented students.

Need-based aid, especially when joined with so-called need-blind admission policies (admissions decided without regard to students’ financial situation), gives families less incentive to save for college, since the more they save, the less aid they will get. A study last year found that the prospect of need-based aid prompted the typical middle-class family with two children not yet in college to reduce its annual savings by about half.

The colleges and universities have justified the ban on "merit" scholarships on equity grounds. If they awarded meritbased assistance, they claim, they would have to cut aid to needy students. But Grossman points out that the richest Ivy League schools—Harvard, Yale, and Princeton—devote a smaller proportion of their gross revenues to financial aid than many of the poorer ones do. Moreover, Grossman says, there’s a lot of fat in higher education—in the form of lavish pay for light teaching loads, substantial support for research projects and graduate students, and time for professors to earn extra income as consultants.

When the U.S. Department of Justice brought an antitrust action in 1991, the Ivies quickly agreed to terminate Overlap; MIT agreed to a separate settlement later. The colleges continued to claim that they were offering aid based only on need. But Grossman says that they seemed to start competing for talented students by stretching their definition of "need" and adjusting their aid offers according to "merit." Over time, he believes, this competition probably would have intensified, to the point where a substantial amount of assistance was being awarded on the basis of merit, more students were getting aid, and the aid packages were larger. Unfortunately, Grossman concludes, this now seems unlikely.

Congress, "in the face of intense lobbying by the educational establishment," enacted legislation in October 1994 that explicitly allows colleges to agree to give only needbased aid, to adopt a common definition of "need," and to exchange any information about the income and assets of prospective students and their families necessary to make their agreement work. In short, he says, all private colleges in the United States now have carte blanche "to collude to limit financial aid in any way they choose."