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Making financial aid work: Merit-based programs over income-based

(Scott O'Connell/Worcester Telegram & Gazette via AP)

(Scott O’Connell/Worcester Telegram & Gazette via AP)

Colleges can improve graduation rates and the likelihood that their students remain in-state by favoring merit-based aid over need-based programs.

A study published by the National Bureau of Economic Research found that a California merit-based aid program “increases degree completion by 2 to 5 percentage points,” increases the likelihood of living in California by 3 percentage points by recipients’ early 30s, and boosts earnings by 4 percentage points.

The findings, led by Eric Bettinger and Oded Gurantz of Stanford University, along with Laura Kawano from the Treasury Department and Bruce Sacerdote of Dartmouth College, could pressure state politicians to expect better results from aid programs, which have increased in state support by 83 percent between 2002 and 2012.

If other states find similar patterns, it could be a death blow to need-based aid, which doesn’t take academic standing into consideration.

In California, the Cal Grant program covers the cost of public tuition and between $9,000 and $10,000 for private college tuition. Students must reach a minimum GPA requirement and be below an income threshold to qualify. Receiving a Cal Grant doesn’t affect attendance, but it shifts students from public to private universities.

The success of the program shows that financial aid, when targeted correctly, can improve completion rates. Though most of the discussion about college has been about access and enrollments, completion remains a key indicator of whether attending college benefits students.

Merit-based aid has grown in popularity and overtook need-based aid by 2008, according to The Wall Street Journal.

The California program accounts for merit and need, in essence avoiding a situation where a student from a rich family and a student who under-performed academically wouldn’t receive state funds for college. The former because their family can afford college tuition, the latter because it’s unlikely they’ll complete a degree.

“Overall our results suggest that the United States’ largest merit aid program does not boost initial college enrollment but has meaningful impacts on persistence and graduation and may have large earnings effects,” Bettinger wrote.

Depending on goals, that’s good news. If policymakers think colleges have a completion problem, not an enrollment problem, the program has some promising implications. As a way to enroll smart, but poor, students, the program isn’t a useful model, as that wasn’t its goal.

Other states that look to copy its effects, too, could be disappointed. California differs from West Virginia or Georgia; offering a cheaper way for students to graduate doesn’t mean they’ll stay in-state.

Critics of merit-based aid, such as higher education expert Mark Kantrowitz, refer to it as “welfare for the wealthy.” Need-based aid “helps those with the most to gain, and it makes our society stronger in the process,” he wrote for the Journal.

Greg Forster, a senior fellow at the Friedman Foundation for Educational Choice, however, calls need-based aid “middle-class welfare” and thinks it drives college prices higher.

“Tuition keeps rising because we keep jacking up aid without regard to academic merit,” Forster wrote for the Journal.

Given the results of the Pell Grant program, a federal program that awards money based on need, Forster might be right.

Pell Grant recipients graduate at lower rates than their peers, which means that the aid might help students enroll, but not graduate.

“Many Pell students attend schools with low graduation rates,” Annie Waldman noted for The Atlantic.

Those students get the means to attend a school, but the school does an underwhelming job of delivering on the promise of a degree.

With the California program, it could highlight a middle way: favor merit-based programs over need-based ones, but include need-based restrictions to make  them more cost effective.

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