The argument surrounding merit aid is not black and white, however. Higher education institutions have been grappling with the intricacies of the merit aid debate for many years. The means by which these institutions have implemented their policies and an examination of their philosophies surrounding the use of merit aid can prove illuminating for independent school enrollment professionals, business officers, heads, and boards.

The Yield reached out to enrollment leaders at two small private colleges, as well as members of the independent school community, to determine the why, who, and how of merit in a time of demographic change, unprecedented financial aid demand, and rising tuitions. Ultimately, we found that only individual schools can determine the appropriateness of merit aid use for themselves, and, in doing so, they need to consider carefully their competitive environment, mission, and the enrollment and tuition revenue goals they hope to achieve.

Merit Aid in Higher Education

Merit aid at the college and university level has been in use as an enrollment management tool for decades, and has become a ubiquitous part of the admission process for both families and institutions. While its injudicious use can lead to significant budget issues (e.g., Temple University’s $22 million financial aid budget deficit that led to the ouster of the school’s president and provost last summer), merit aid can also be utilized as a crucial part of an institution’s enrollment plan. Chris Hooker-Haring, vice president for enrollment at Muhlenberg College in Allentown, Pennsylvania, has been at the helm of a carefully strategized merit aid program for many years.

With an aid program that annually aims at an approximate 30/70 split between merit and need-based aid, he sees the merit program performing a very distinct function for the school: “We’ve been very focused on targeting academic pacesetters. They can affect everything that happens on our campus. We’re determined to have our financial aid—all of it—serve multiple purposes for the college. We have a very strong commitment to access, and we are also concerned about influencing choice.” Hooker-Haring emphasizes that while merit aid is used strategically at Muhlenberg, its use in conjunction with needbased aid is essential. “Some people believe philosophically that all aid should be need-based aid. The two don’t necessarily have to be mutually exclusive. Our financial aid program meets a lot of priorities: diversity, access, student quality. It’s a whole spectrum of things we’re trying to have financial aid do for us, including responding to what competitors are doing. The art is to find that balance that allows us to meet as many of our priorities as we can each year," he asserts.

Matthew Ward, vice president of enrollment management and marketing at California Lutheran University (Thousand Oaks, CA), agrees: “It’s really been a matter of honing the strategy and considering what opportunities there are to shape the class in the way that meets our enrollment objectives. Fundamentally or conceptually speaking, the goal of developing a merit aid program is to optimize financial aid expenditure to enhance yield with certain populations of students that we’re trying to enroll.”

While both professionals incorporate merit aid into their overall enrollment strategies, they also provide a similar caveat—the use of merit aid in ways that does not dovetail with a school’s overall mission has resulted in families “shopping” for schools rather than selecting for fit, and schools “buying” classes of students not necessarily suited to their campuses. As Ward asserts, “Lots of institutions can buy themselves classes where you put a particular amount of aid on the table to try to influence a single year’s results. But, a good strategy, I think, looks at it generationally. It is important to consider the long-term ramifications of providing merit scholarships to students who might not enroll without them.”

Using merit aid as an enrollment strategy for these two schools mirrors the trend of tuition indexing in independent schools. As Ward says, “The economics of it relate to tuition elasticity. The goal is to try to find the right price point.” Hooker-Haring sees this as a very deliberate method of removing barriers: “If we see an attractive student, our goal is to determine what it will take to enroll that student. We try to take dollars off the table as the primary driver of a family decision, recognizing that we are not operating in a vacuum, and other schools are also competing for that student. How far a college or secondary school can go will vary according to the institution.”

Susan Robinson, currently director of enrollment management at Friends’ Central School in Philadelphia (PA), has seen the merit aid discussion from both sides. While Friends' Central is philosophically opposed to aid that is not need-based, in her former roles at both Wagner College (NY) and Moore College of Art & Design (PA), she utilized merit aid strategically. She emphasizes that “We have to remember that at the college level, there are many, many other sources of support. There could be a state grant. There are obviously loans, college work study, and federal aid. This is very different than at most independent schools where most of the money, if not all of it, comes from the school itself.” Robinson used merit aid specifically to enhance the applicant pool at Wagner and at Moore: “We were looking to increase the overall academic profile of our applicant pool, of the students we enrolled. By recognizing students who were academically accomplished, but whose families knew they couldn’t apply for financial aid, a merit program really helped to attract them. The effect was immediate.”

Does Merit Poach Need-Based Funds?

Opponents argue that the funds directed to those who do not qualify for need-based aid are siphoned off a school’s financial aid budget, lessening the amount of funding available for those children who really need it. Chris Hooker-Haring argues that the basis upon which families are determined eligible for aid at colleges and universities (the Free Application for Federal Student Aid, or FAFSA) is fundamentally flawed: "There is a reason that many of the most selective institutions have moved away from the FAFSA to their own institutional aid programs. They have recognized that it was not necessarily serving them or their families well. Many of the families judged 'no-need' or almost no-need by the FAFSA cannot afford our price tag." He points to the fact that the needs analysis is now being revisited and adjusted on many college campuses as evidence that a one-size-fits-all approach is not effective.

"We are very committed to helping the neediest students," says Hooker-Haring, indicating an upward trend in Pell-eligible students at Muhlenberg. "At the same time, we don't want to lose students in the middle," he says, pointing to what some educational demographers are calling "middle class melt," a term that defines the hollowing out of the middle class on many college campuses, contributing to a barbell effect where only the poor and very wealthy can afford to attend private colleges.

Cal Lutheran’s need-based program is closely intertwined with its merit program. “We look at things without considering need first and award merit-based scholarships,” Ward explains. “For about 65% of those students who receive merit aid, we’ve met their need through merit scholarships. Then there’s an additional 15% or so that receive need-based aid.”

Peter Anderson, currently director of enrollment management and admission at The Episcopal Academy (PA) and formerly director of admission at Lancaster Country Day School (PA), where he oversaw a robust scholarship program, agrees that a strategically planned merit scholarship program can attract potential applicants who may enroll even if they don’t get the scholarship, thereby increasing revenue that could presumably be funneled to a need-based program. But Anderson explains, “If you’ve met budget but are not at capacity, then you’re not losing any money by offering a 50% discount.” As Anderson sees it, “Basically, you make the pie bigger, which allows your need-based piece of the pie to get bigger, so that far from cannibalizing your need-based program, you’re actually increasing it.”

Geordie Mitchell, director of enrollment management and strategic initiatives at Buckingham Browne & Nichols School (MA), adds another example of the use of merit aid. “One particular school had a full scholarship. Just one,” he related. “The way it was designed, any student that was interested in it had to come to the school and take the admission test, while the parents heard a presentation about the school. All of a sudden, the school gets a huge bump, because they’re offering this one scholarship. If 10 percent of those adults who visited said, ‘You know what? Whether we get this scholarship or not, we’re now interested for our child!’ Look what they’ve done. It can be incredibly effective from a school marketing perspective to use merit aid as a carrot.”

Market Forces

For those schools that choose to utilize merit aid as an enrollment management strategy, the primary goal can be varied; schools use merit aid for increasing overall enrollment, driving more interested visitors to campus, attracting a specifically talented subsection of students, and raising the school’s academic profile. Often, several of these goals intertwine.

Jim Kennedy, director of admission at Baylor School (TN), is enthusiastic about his school’s use of merit aid: “In general, I think it’s a terrific tool. I wish we had more of it to utilize, because the limited resources that we do apply to merit aid have been really successful for us.” Baylor, which is prohibited from offering merit aid to athletes by the Tennessee Secondary School Athletic Association (a practice not uncommon among athletic conferences across the country), does offers a single academic scholarship for day students (the Jo Conn Guild scholarship), and a four-scholarship academic program for boarding applicants (the Distinguished Scholars Program, or DSP).

As Kennedy states, the boarding scholarship program “was established about 15 years ago, and it really did have a dual purpose. First was to increase the boarding applicants to Baylor. Second, and of equal importance, was to try to increase the academic quality of the applicants.” While Baylor provides millions of dollars a year in need-based aid, the scholarship program, particularly the boarding program, is intended to strengthen the school community. “I think the stronger the students we can get in the door, the better our overall residential life program is, because if you have a better boarding community, that just begets a stronger applicant pool as your reputation improves. It’s a momentum builder for us.”

The competitive nature of a school’s environment may also be a driver towards merit aid. In hyper-competitive markets, merit aid may be seen as a given among competing schools, contributing to the “shopping” phenomenon that currently prevails in some college circles. Baylor’s environment is very competitive, with most colleague schools offering merit aid as well. Kennedy realizes the importance of providing an exceptional visit opportunity for those families who come to school to compete for his scholarships: “We’re getting really good kids to come as finalists for the DSP, but we are not the only school that’s trying to enroll them. So it is very competitive, and it’s made us much more cognizant of putting together a quality experience for them while they’re here for the weekend."

On the flip side, merit scholarships can be used in a market that is unaware of the benefits of private school and hasn’t had the exposure of a market like Baylor’s, or when a school is experiencing declining enrollment, to boost numbers. While his school does not employ merit aid, Mitchell advises other schools on enrollment strategy and says, “The schools that I’ve seen do it well, the schools that I’ve recommended it to, are schools that aren’t full. They are schools that need to increase the awareness of the product and value that they offer in the communities in which they find themselves.”

Avoiding the Slippery Slope

As independent schools debate and consider the use of merit aid as an enrollment strategy, it’s crucial that they be honest with themselves about what they want to accomplish and how merit aid suits their goals and philosophy. It’s essential that reliable data are compiled and arguments both for and against fully explored. This is one topic on which the admission and business offices should confer.

Thom Greenlaw, a former independent school business manager who currently consults for schools, has participated in many discussions surrounding the use of aid in general. “When I first came into this industry almost 25 years ago, financial aid was always, always based upon need and based upon a very clear pathway forward to bring economic diversity to a school. I’ve seen the evolution of that to today’s world where folks are, first of all, confusing the terms. They’re not managing to their mission of providing financial aid to otherwise excellent students who require financial assistance. They’re doing, in fact, discounting, and using different kinds of aid to do that.”

Greenlaw sees the conversation surrounding aid as essentially a distractor to the main discussion, which should be centered on right sizing. “When I think quite honestly,” he says, “I look at all these tools to fill your seats or fill your beds as gimmicky. I think that the deeper conversation that schools ought to be having is on their financial sustainability and looking at what is actually the size and composition of the school that they want to be and want to have.”

Additionally, schools can find they are on a slippery slope if they do not strictly limit and control their merit aid offerings. Current parents may hear of a new merit aid program and demand to know why it was not offered to their children. Families may insist that they are only a few points away from a score-based scholarship. The “shopping” phenomena that currently plagues some higher education markets could become an issue. As Greenlaw states, “I’m old fashioned enough that I think discounting ought to be done to bring in terrific students who can’t afford your school, period, and not parents who decide they want to negotiate with you, and creating these really untenable situations.”

Mitchell has seen this same phenomenon: “I would encourage any school considering merit aid to look squarely at their mission and make sure if they’re moving in this direction, they know exactly why. Often schools that struggle to fill their seats get into this barter system, instead of a clearly defined merit system, and then it snowballs. They don’t know how to stop it, and every year they look at the end of the admission season and they still have X number of spaces and they think, ‘Aha, if we give merit aid or we barter, we can fill five more of these spaces.’ Five one year becomes 10 the next year becomes 15 the next, and it spirals out of control. Be crystal clear both internally and externally how this is going to work and understand a big stumbling block you may face is those families who are already at the school who say they want to apply for the scholarship.”

The Merit Aid Decision

Philosophical arguments and precautions aside, it is the individual school’s leadership that must ultimately make the decision whether to use merit aid. That decision can be fraught with strong opinions on both sides. Hooker-Haring cautions, "Remember, the marketplace gets the last vote. To a certain extent, decisions like this are a function of where you sit in your own particular market. If your competitors are all offering merit aid, it may be difficult or impossible for you to meet your enrollment goals without responding with merit aid. Data is crucial to this kind of decision making. Thoughtful conversation, small scale to start, and data-driven experimentation are the keys to moving forward with a merit program."

Cal Lutheran’s strategy is based on optimizing net tuition revenue, as well as balancing the student population and ensuring that the “right” students (those with the capacity to succeed and graduate) are being offered the opportunity to do so: “That’s where the mission, I think, is really important, because we could just be totally focused on maximizing tuition revenue, which would mean that we’re going to set up a scholarship program that’s going to benefit families with the ability to pay and not target students who aren’t going to graduate or do as well here,” says Ward. “In these times, in the challenging economics of higher education and certainly in the independent secondary sector as well, institutions can get caught up in that trap—just a focus on the tuition revenue side. It’s important as an enrollment management leader that you’re able to articulate the long-term strategy and need to balance between these competing priorities.”

Whether a school decides for or against merit aid, the surrounding market, public perception of the school, and its mission must take center stage. Whether funding for such a program comes from additional revenue generated by interested families drawn to campus by the promise of a scholarship offer who then become paying members of the community, an advancement campaign designed to attract donors to contribute to a scholarship fund, diverted advertising dollars, or the budget itself (as a line item), the continuing needs of the traditional financial aid family must be addressed. A deliberate, controlled, and data-driven process is essential to creating a sustainable merit aid program that meets both the fiscal and philosophical needs of a school’s community.