Study Shows Merit Based Scholarships Growing, Need Based Staying Flat

A new study from Sallie Mae is the second this year to show that students who come from higher-income homes typically get more generous financial aid from colleges than their low-income peers. According to the study, not only do just 35% of all scholarship offers go to students from families that make below $35,000 a year – compared to 36% for those from wealthy families – but that the average grant was lower by nearly $3,000.

An average grant to a low-income student totaled $7,237. An average grant for wealthy students totaled more than $10,000.

The previous study that tackled the topic was published by the New America Foundation, which used federal financial aid funding data to conclude that schools have begun to favor merit-based financial aid awards over need-based aid. Between 1995 and 2008, the number of merit-based scholarships more than doubled from 8% to 18%. Merit-based awards were particularly popular at smaller, private colleges where the proportion went up from 24% to 44%. At the same time, the percentage of students being offered financial aid packages based on need has remained flat.

Why is this happening? For starters, colleges are in a perpetual race to rise in published rankings. Second tier schools are using offers of aid as lures for highly qualified students who might not otherwise attend—even if those students don't really need the money.

Many colleges are also constantly striving to maximize their revenue, and to that end, some give preference to wealthy applicants. The New America study found that "10 percent of college admissions directors at four-year colleges (and nearly 20 percent of those at private liberal arts colleges) reported that they give affluent students a significant leg up in the admissions process."

Kelley Holland of CNBC writes that according to Sallie Mae, colleges offered low-income students packages that, on average, cover 37% of their total college costs in the 2012-13 academic year. That is a substantial decline over the 42% they covered in 2008-09. Over the same period, aid package numbers of middle-income students have hardly changed at all.

According to Sandy Baum, who is a senior fellow at George Washington University's graduate school of education, and who was the author of a College Board report "Trends in Student Aid," the falloff is in part explained by the fact that smaller, less selective schools must work harder to attract high-caliber students and have used merit aid as the means to do this at the expense of packages offered based on need.

"They need to draw in students with money, and they are terrified that the college down the road is giving them a merit scholarship," she said. But overall, "when you look at the percentage of aid going to students without need, it's declining. It's not rising."

The most selective public and private colleges are awarding more money based on need, the study found. But those colleges also have the wealthiest students.

"Those really high priced schools are giving bigger grants to the low income kids, but they don't have very many of them," Baum said. And the students at the lower end of the income scale at the pricey, selective schools may still be better off than low income students at less selective colleges – which can mean a low income student at a selective school receiving aid may look like a middle class student on a national scale.

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