Keeping up with the Joneses: Institutional changes following the adoption of a merit aid policy

The increasing use by private colleges and universities of financial aid based on “merit”, as opposed to based solely on financial need has caused many to raise concerns that this type of aid will go mainly to higher income students crowding out aid to lower income students. However, some analysts suggest that by attracting more “almost full-paying” students through the use of merit aid, institutions will have more financial resources that they can use to increase their financial aid to low-income students and thus their enrollment. Results using data from the College Board's Annual Survey of Colleges and other secondary data sources suggest that the increased use of merit aid is associated with a decrease in enrollment of low-income and minority students, particularly at more selective institutions. Middle and bottom tier colleges may be offsetting costs with tuition increases, as the introduction of merit aid is accompanied by an increase in net costs.

► Private colleges introduce merit aid as a response to low SAT growth as compared to peers, and decreases in USNWR rankings.
► Merit aid policies lead to decreases in low-income and minority student representation at selective institutions.
► Middle and bottom tier colleges increase net costs following the introduction of merit aid programs.