The Student Aid Game: Meeting Need and Rewarding Talent in American Higher Education

Richard Barrett
Economics, University of Montana

The late 1970s marked the emergence of two trends in the American economy which threatened to alter significantly the character of higher education as a vehicle of social and economic mobility. The first of these trends occurred in the labor market, where previously sustained growth of real earnings ground to a near halt and, at the same time, the distribution of these earnings became markedly more unequal. While economists debated the causes of these developments, one thing was clear: increasing inequality was strongly associated with a widening earnings gap between workers with, and workers without, higher education. Stories of new BAs brewing lattes or slinging burgers notwithstanding, the only thing worse than graduating from college was not graduating from college. From 1980 to the present, college graduates more or less held their own, but the real earnings of high school graduates (and, of course, drop outs) declined precipitously.

The second trend involved the fiscal crisis of state governments, which increasingly found themselves squeezed between a tax revolt, on one hand, and intense pressure to spend more money on entitlements and prisons, on the other (1). Legislators, governors and budget directors found that the only way to deal with this problem was to spend less on other big ticket items, among which, in most states, higher education figured prominently. All across the country public support for higher education fell and institutions responded, inevitably, by raising tuition.

Together, of course, these two trends led to a potential increase in social and economic stratification operating through differential access to higher education. Just as higher education was becoming a critical line of defense against the erosion of real earnings, families, and especially poor families, would find it increasingly difficult to afford. Families who could afford college, on the other hand, would have a way of assuring their children's future earnings. And the gulf between these families would grow.

This threat of increasing stratification could be reduced, of course, by the appropriate funding and administration of financial aid, and understanding the changing financial aid landscape is essential to interpreting the developments of the last two decades. It is this understanding of financial aid that Michael McPherson and Morton Schapiro seek to provide in The Student Aid Game: Meeting Need and Rewarding Talent in American Higher Education.

It should be said at the outset that this book is not for everyone. The authors are both economists and higher education administrators (McPherson is President of Macalester College and Schapiro is the Dean of Letters, Arts and Sciences at USC) and the book reflects their professional orientation. It is long on charts and tables and a little short on narrative. But the authors have drawn on a wide variety of sources to compile an impressive body of data, and their analysis of this data is thorough, sophisticated and judicious. Among other things they find that

• Net tuition, (tuition minus financial aid,) has been rising for students at all income levels, and relatively speaking most rapidly for those with the lowest incomes. Low income students still pay less, in part, of course, because they attend less costly institutions.

  Despite increased tuition costs, enrollment rates are higher now than they were in 1980. This does not mean that higher tuition fails to depress enrollment; it does, especially among low income students. It's just that other factors, and especially the increasing impact of higher education on earnings, counteract the effect of rising tuition.

• The pattern of enrollment by type of institution has changed in a variety of ways. Most notably, upper income students have moved away from private colleges and towards public universities. The types of institutions students choose to attend tend to vary with income level; in particular, attendance at two year colleges rises as income falls and this disparity in attendance patterns by income level has become more pronounced.
• Granting financial aid solely on the basis of need is a luxury only a handful of elite schools (Harvard or Stanford, for example) can afford. This is because they can attract an extraordinarily large pool of highly qualified applicants without offering merit based aid.
• Other institutions, although they might aspire to grant aid on the basis of need, must also reward merit and have done so increasingly since 1980. Particularly for those institutions that are losing enrollment, merit aid is a tool of enrollment management. Using merit aid to lure good students away from the elite universities, these institutions can dramatically improve their student profiles and make themselves more attractive to potential applicants. This strategy carries the risk that it can devolve into a price war, with institutions cutting tuition to capture shares of a limited pool of applicants, with attendant revenue losses.
• For many able students, merit aid offers from very good schools are difficult to resist. Faced with the choice between, say, a full ride offer from Washington University and admission without aid to Harvard, students and their families must decide whether Harvard is worth $30,000 more per year than Washington; for many the answer will obviously be no.
• By dispersing the most able students across a range of institutions, merit aid may enhance learning by less able students. Although evidence from higher education on this issue is sparse, McPherson and Schapiro report that studies from primary and secondary schools demonstrate that mixing ability levels improves learning outcomes for average students.
• To some extent, the burden of paying for higher education has been shifted not just to the poor, but to the future, as institutions have responded to the financial crisis by cutting maintenance and capital budgets.

While The Student Aid Game provides a comprehensive overview of tuition and aid issues, faculty readers may be disappointed by some obvious omissions. There is no discussion here, for example, of how rising tuitions contribute to the view that students should be treated as consumers or how cost pressures and price competition may be leading higher education, however mistakenly, down the road to electronic and distance learning. Nevertheless, McPherson and Schapiro have produced an interesting and significant book, one that belongs in the professional library of any reader with a more than passing interest in the economic and social role of American higher education.

1. Montana and some other states also were forced to spend money on court mandated school equalization plans.