The Changing Nature of Financial Aid

By Heller, Donald E. | Academe, July/August 2004 | Go to article overview

The Changing Nature of Financial Aid


Heller, Donald E., Academe


Colleges and universities are relying on merit-based aid to compete for the best students. The big losers in this competition are those students east able to afford college.

Historically, states, higher education institutions, and the federal government awarded financial aid to undergraduates based mostly on the financial need of students and their families. The rationale behind the use of "means testing," or assessing a family's ability to pay for college, is rooted in the ideals of the Higher Education Act of 1965. Title IV of that legislation, which authorizes the federal student financial assistance programs, opens with this statement:

It is the purpose of this part to provide, through institutions of higher education, educational opportunity grants to assist in making available benefits of higher education to qualified high school graduates of exceptional financial need, who for lack of financial means of their own or of their families would be unable to obtain such benefits without such aid.

A complex formula known as "needs analysis" took into account family income, assets, and other characteristics to determine the amount that a student and her family could afford to contribute to postsecondary education. The difference between the cost of attending the institution of the student's choice (including tuition, room, board, books, transportation, and other expenses) and the family's contribution established the amount of financial aid for which the student would qualify.

Over the past decade, however, a major shift has occurred in the way states and colleges and universities award financial aid to undergraduate students in the United States.1 Both states and institutions have substituted measures of academic merit for financial need as the basis for awarding grants and scholarships. And both are abandoning the concept of "exceptional financial need" as the factor determining who should receive aid.

State Grants

The 1972 reauthorization of the Higher Education Act created the State Student Incentive Grant (SSIG) program, since renamed LEAP (Leveraging Educational Assistance Partnership). The SSIG provided federal matching funds to states that implemented programs that awarded scholarships to students based on financial need. It proved to be a critical catalyst to the development and expansion of state grant programs. In 1969, nineteen states appropriated just under $200 million for these programs; by 1974, thirty-six states allocated $423 million to them. By 1979, every state and the District of Columbia reported at least one need-based grant program, and the total appropriation had increased to over $800 million, according to the National Association of State Scholarship and Grant Programs. Spurred on by the SSIG, states began to award most of their grant dollars based on the financial need of the student.

The creation of the Georgia HOPE scholarship program in 1993, however, initiated a transformation in state aid programs. Georgia's HOPE program was the nation's first broad-based, state-run merit scholarship program. It is funded by sales of lottery tickets. Before Georgia launched the HOPE program, states allocated less than 10 percent of their grant dollars to undergraduates without considering financial need. Since 1993, thirteen states have followed Georgia's lead and developed similar merit-based programs, although they use different criteria to determine merit and varying sources to fund the programs. Today, as figure 1 shows, merit-aid programs represent 25 percent of state grant dollars awarded to undergraduates without consideration of financial need, or over $1 billion.

The effect of these merit-aid programs on college access differs substantially from that of need-based grant programs. Merit grants go disproportionately to students who would have attended college even without the public assistance, while need-based programs help those who the research tells us require assistance to enroll in college. …

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