How Much for That Student?

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Julie Mulligan, a senior at New York City's elite Spence School, has a problem many of her college-bound contemporaries would envy. Accepted at five prestigious universities, including Cornell in the Ivy League, she is weighing scholarship offers from two: $10,000 a year from Rice University in Houston, and $25,000 a year from Tulane in New Orleans. Julie's status as an A student with 1520 SATs attracted these offers, even though her father Jerry, a Manhattan lawyer, earns too much to qualify for a financial-aid package based on need.

The bidding war to sign Julie is good news for the Mulligans and other families of hard-working, high-scoring students. But many educators believe this competition poses a danger to the traditional, lower-income recipients of financial aid--and ultimately to some of the institutions themselves. Money awarded to high achievers, they say, will ultimately reduce funds that might have gone to needier students who, while academically qualified for top colleges, are less likely to have the highest SAT scores or class rank. Yet many colleges feel compelled to spend what it takes to enroll anyone whose numbers will improve their standing in the national rankings, which often seal their reputations among applicants.

The result, some educators fear, will be a widening chasm between a few richly endowed institutions able to buy the very best applicants and a growing legion of poorer colleges, public and private, forced to use scarce money to attract good students--money that might be better spent on a new science lab or faculty salaries, as well as on scholarships for the needy. Says Professor Gordon Winston, co-founder of the Project on the Economics of Higher Education at Williams College: "We're going to be using up these resources on the rich kids and not have any left over for the poor kids."

The weapons in this war are called "merit-based aid" and "preferential packages." The latest skirmish began in February, when Princeton University, whose $8.4 billion endowment is the largest per student of any U.S. college, announced that it would no longer require its scholarship recipients to take out loans as part of aid packages, replacing them with outright grants. This change will save individual students tens of thousands of dollars and make Princeton more attractive than some equally prestigious campuses--unless they match the offer. Some are doing just that.

According to Ron Ehrenberg, director of Cornell's Higher Education Research Institute and author of Tuition Rising: Why College Costs So Much, Princeton's move (a shift of $16 million a year in resources) is triggering similar deals at Harvard, Yale and M.I.T. Last week Dartmouth announced that grants for next year's freshmen will increase an average of $1,750 per student. Jim Bock, acting admissions dean at Swarthmore, says Princeton's move "raises the bar," adding, "We're always refining our policies."

However, ripples are also being felt at institutions that, while selective, can ill afford to bid more for top students. Pennsylvania's Dickinson College has an endowment less than one-fiftieth the size of Princeton's and must carefully husband aid. "Princeton," says Dickinson vice president for enrollment and student life Robert Massa, "has reduced the maneuverability of making a financial-aid package competitive."

This is the second time in three years Princeton has stolen a march in the tuition wars. In 1998 the university announced it would no longer count the value of an applicant family's home as part of the formula it uses to determine financial need. That change allowed many applicants to qualify for a few thousand dollars more in aid.

For most of the past half-century, financial-aid officers at selective colleges--including M.I.T. and the eight Ivies--agreed among themselves on a single method of calculating a family's ability to pay. Applicants were told what their "expected family contribution" would be. But in 1990 the U.S. Justice Department charged these colleges with price fixing. The case was settled in 1993 when the colleges agreed to stop swapping financial information about their applicants. Still, they insisted they would strive to confine aid to those who were in need.

At first, the collapse of the scholarship cartel seemed a good thing. With tuition at private colleges soaring nearly 75% during the 1990s alone, a little price competition among them seemed in order. In fact, market forces had been at work in college admissions for at least a couple of decades among the less competitive institutions, some of which needed to charge lower prices just to fill their classrooms. But since the lawsuit, a growing number of selective colleges--those whose applicants outnumber their available slots--have begun offering financial incentives regardless of need.

Ironically, the most selective colleges, often those that can best afford to give money away, benefit from a kind of Chivas Regal effect, in which buyers are willing to pay for cachet. While Princeton and a few other top colleges continue to limit aid to those in need, their actions are fueling a bidding war among schools eager to win kids away from Princeton--or any other college above them in the perceived pecking order. As a result, observes James Monks of M.I.T.'s Consortium on Financing Higher Education, "financial aid is no longer viewed as a charitable means of admitting a 'poor scholar,' but rather as a price discount to which an applicant is entitled and which is subject to negotiating and bargaining."

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