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Inside college merit aid — and the manipulative, lucrative system that keeps it running

Schools ask families to jump through several application hoops just to put themselves in the running to write some of the biggest checks they’ll ever write.
Image: Douglas County High School Graduation
Douglas County High School students celebrate their graduation at the snow covered Douglas County High School Stadium in Castle Rock, Co., on May 21, 2019.Hyoung Chang / MediaNews Group/The Denver Post via Getty Images file

This piece has been adapted from "The Price You Pay for College" by Ron Leiber.

You want merit aid, and that’s understandable. But here’s what you probably don’t realize: There is a system that operates behind the scenes to distribute these discounts that itself requires about $1 billion of annual care and feeding. It works in part by manipulating you emotionally. And because you may not be expecting a sly, soft sell, you probably don’t know to look out for it.

Let’s fix that. If there is a single bit of emotional truth that undergirds the merit aid system, it’s the one that Davin Sweeney uttered on "The Crush," his podcast about college admissions: No families are longing to have college administrators single them out for their financial need. Instead, they want authority figures to focus on their record. Merit aid puts achievement before disadvantage.

Sweeney should know, since he got an insider’s view of the merit aid toolbox as an admissions staffer at the University of Rochester. Now he’s on the other side, working as a school-based college counselor. Many families come to him blind, with an only child or a firstborn son or daughter, and have no idea how the system works or why a school that they can already afford might target their child with a discount. But as we’ve learned, affordability is often not the point when colleges put a pile of merit aid onto the table. Parents are susceptible to offers of unsolicited gold stars for having raised fine children. Teenagers, meanwhile, might buy a hard sell, given that most people have been telling them all along that it is the applicants who must prostrate themselves these days. It is hard to resist a pat on the back and a discount, and the colleges know this. They’ve proved it, in fact.

If you spend any amount of time on college admissions and financial aid websites trying to figure out who the gatekeepers are and whom they report to, you’ll often notice someone overseeing something called enrollment management. Perhaps this rings a bell. Maybe you know something about the airline industry, where American Airlines used mainframe computers to popularize what came to be known as yield management. The big idea was to use historical data to try to predict which seats on which flights would sell out by what date. Then the airline would price seats accordingly, changing fares constantly right up until takeoff in order to maximize revenue.

Enrollment management, which emerged in the 1980s but really came into its own a decade or so later, isn’t all that different. Just think about an empty classroom seat or a dorm bed the same way you would an airline seat: Both are useless when a plane pushes back from the gate or a semester begins. Enrollment management calls for using data to figure out which students to recruit and how to woo them. To do this, schools draw in part on information that students supply when taking the PSAT. Test takers pay for the privilege of taking the test in most instances; then the test administrator performs the nifty trick of turning around and selling colleges access to the data so they can use it for marketing.

The merit aid strategizing extends to figuring out what to say to the students during the courtship and finding out whether they need incentives, such as application fee waivers. Once high school seniors apply, schools often use algorithms and software to predict what sort of discount to offer, if any, to get them to say yes. The wooing continues over the summer lest incoming students change their minds during what is known as the “summer melt” period. Finally, schools track the undergraduates themselves once they arrive, since any single one who drops out or transfers can represent lost revenue of well over $100,000.

This is where the $1 billion comes in. Given the stakes, most colleges have long since stopped trying to manipulate the data themselves. Instead, most of them spend piles of money on consultants who suck in the figures and put the numbers through proprietary algorithms. The software spits out custom-crafted, head-spinning offer grids that help dictate who gets what amount of merit aid. You’ve probably never heard of these companies, and they and their clients are fine with that. When they market themselves to colleges, they refer to what they do as “financial aid optimization.” That sounds rather nice, with its hints of smoothing things out and spreading the discounts around so all students get just what they need. But eventually the firms get around to using the word “leverage,” as in using brute force, involving large amounts of money to maximum advantage.

The consultants help schools leverage information about your family to optimize your discount, if any, and the process can get quite granular. Each year, colleges decide where their priorities lie, and they mostly have similar goals. They hope to attract a larger pool of applicants who are more racially and geographically diverse than the previous year’s pool and who have even better credentials. They would also like their net tuition revenue per student — the money they take in after all need-based and merit grant aid — to rise. And they want to lose even fewer students to their rivals.

To try to win — or not to lose ground, at least — the consultants help schools keep track of which students are coming to their websites, how much time they spend on which page, and how quickly they open emails. The schools tap into proprietary databases that the consultants maintain in order to track the quality of thousands of high schools and the sorts of colleges that their graduates have attended in the past. Then the consultants pull in as much data from each college as it has, including what sorts of students responded to earlier marketing campaigns and the numbers and demographics of all the people who applied, who got in, and who matriculated at what price point. Once the latest applicant pool is in place, the consultants provide algorithms that suggest what size discount, if any, to offer to whom.

Human beings can and do intervene. Some merit programs are limited or lucrative enough that real people run the entire process. In others, admissions officers grade each admitted student with a numerical score that translates into a merit aid offer. But overall, software does far more work than most applicants ever know. Because algorithms don’t know what to do until humans program them, it might be helpful to consider a programming script that amounts to something like this: “Discount only as much as you have to in order to get someone to say yes, but not one dollar more. And for people living in affluent zip codes, keep in mind that even a mere $10,000 is probably enough to get them to feel good about themselves so that they’re not the only sucker paying full price and can run around town saying that their kid got an academic scholarship.”

This is probably a bit too cynical. Then again, several years ago one of the biggest consultants got caught pitching a brilliantly evil bit of strategy based off a clever reading of the FAFSA form. On that form, applicants state which schools they want to receive their data. What the consultant discovered is that lots of families would list those schools in order of preference. Schools that found themselves on top of lots of lists could keep that in mind when considering how much aid to offer to families who seemed desperate to attend. Wink, wink. Nod, nod. Word got out, and within a few years, the schools could no longer see the order in which families listed recipient colleges.

But the enablers are not the part of the merit aid system that has the potential to be most problematic. Instead, the most disturbing element is probably the inequity that can result. One take goes like this: Taken to its extreme, merit aid uses money that could go to less affluent students and replaces them with people who could afford to pay but just aren’t willing to do so. If your list price is $70,000 per year and you give

$20,000 per year in merit aid to a student, that’s $200,000 in revenue over four years. If it costs only $150,000 to educate that student over the four years, you’re coming out ahead.

And that $200,000 student might replace one whose family can afford to pay only $100,000 over four years, thus requiring a $50,000 subsidy from the school to get to that $150,000 break-even number. Sure, the families who can pay more might have children with better grades and scores, but that’s because of long-standing links between affluence and, say, the ability to hire an SAT tutor. By not only admitting disproportionate numbers of affluent students but actually throwing money at them if they come, the schools simply perpetuate the inequities.

Image: The Price You Pay for College

Schools have a number of responses to that. Some are rather blunt, as when the financial aid director at Boston University demanded to know, in 1995, why she had an obligation to educate poor students in the first place. Wasn’t that the federal government’s job — one it was failing at, given how low the maximum Pell Grant for low-income students was and the fact that the student loan system didn’t support borrowers properly? At the College of the Holy Cross in Worcester, Massachusetts, the financial aid director stated quite plainly that ethics in the field had shifted away from principles of egalitarianism. Instead, the need for sheer survival in the marketplace necessitated budgetary tactics that would have been unimaginable a few decades earlier.

Other schools maintain that they have committed no sins of inequity, and some of them may have a point. Here’s their challenge: The marketplace has spoken, and there are only so many people in any given year who are able to pay full price. Willingness is another thing, especially in an environment in which competing schools have gotten into the habit of offering unpredictable discounts. As a result, if your school doesn’t give a certain number of $15,000 discounts to people who can afford to pay your $60,000 list price but won’t, you won’t have enough people paying $45,000 to cross-subsidize the ones who can pay only

$15,000 or less. Few schools have an endowment big enough to have unlimited numbers of undergraduates with lots of financial need, so they have to use tuition dollars from that same year to pay for the need-based aid. But there are very few private colleges that are enticing enough to attract lots of affluent people who are willing to pay full price or close to it. And so we get merit aid, which the schools hope will allow them to have a respectable mix come Labor Day of students from across the social-class spectrum.

There are very few private colleges that are enticing enough to attract lots of affluent people who are willing to pay full price or close to it. And so we get merit aid.

Jerome A. Lucido runs the University of Southern California’s Center for Enrollment Research, Policy and Practice and oversaw the university’s enrollment operation in a previous role. He suggests thinking about financial aid in one of three ways. First, there is true merit aid, which is a scholarship that may come with additional opportunities, such as admission into an honors program and mentorship opportunities with faculty. “I think that is distinctly different from merit aid that is really a discount [the second kind], where they’re using predictive modeling and analytics to determine how much people in your neighborhood are willing to pay while still allowing me to add to net tuition revenue at my school,” he said. The third kind is the old-school financial aid that schools base entirely on students’ demonstrated need.

There is an additional phenomenon to be aware of that has muddied the waters further: Many colleges, acting on their consultants’ advice, give out merit aid and use it to cover part of a student’s demonstrated financial need. The National Association of College and University Business Officers produces an annual discounting study that collects data from hundreds of member schools. For years now it has found that scores of colleges are using more than half of their merit aid to meet financial need. The organization sees this as evidence that the need-versus-merit discussion is a “false dichotomy.”

I’d urge you to think about it differently. If there were no difference between how merit and need-based aid affected families, colleges would use just one term or the other or find a neutral one. In many instances, there doesn’t seem to be any difference from an accounting perspective: A discount is a discount, no matter what it’s called. But colleges know from the very data that their consultants help them process that patting people on the head and calling them meritorious will make them feel good about themselves. Their professors have studied it in fact, with one paper showing that if a scholarship has a name, it can materially affect a prospective student’s decision-making. Perhaps the recipients should feel good. And perhaps they should also understand that these kinds of merit awards are, at least in part, about marketing. Marketing aims to make people feel a certain way.

However inequitable merit aid may seem in certain circumstances, I’m not here to argue that you shouldn’t take it if a school offers it to you. I’ve never heard anyone else make that case, either. Take whatever you can get. The challenge here, which is an extension of the one we saw with need-based financial aid, is that it can be very difficult to predict if a school will offer you merit aid and how much. It bears repeating, and I’ll say it a few more times before this book is done: Schools ask families to jump through several application hoops just to put themselves in the running to write some of the biggest checks they’ll ever write, but you often don’t get to find out the amount until several months into the process. That takes some nerve.

This is an excerpt from "The Price You Pay for College." Copyright © 2021 by Ron Lieber. Reprinted here with permission of Harper, an imprint of HarperCollins Publishers