THE SHIFTING ROLE OF INSTITUTIONAL AID: WHAT ABOUT NEED?
The National Association for College Admission Counseling (NACAC), in partnership with the National Association of Student Financial Aid Administrators (NASFAA), identified the financial aid application process as a barrier to more equitable college access (NACAC & NASFAA, 2022). The maximum Pell Grant in 2025-26 covered just over a quarter of the average total cost of attendance at public four-year institutions nationally and while increasing the Pell Grant is important, it is time to shift the conversation to examine how institutions distribute financial aid. Since Donald Heller’s seminal work on the shift from need to merit-based aid over 20 years ago (Heller, 2006), the research on the distribution of institutional aid has been sparse.
Recent threats to federal financial aid programs and cuts to research funding have left the fate of lowincome students and the institutions that serve them in the balance (Knox, 2025). This follows the dismantling of race-conscious admission policies by the U.S. Supreme Court in the cases of Students for Fair Admission, Inc. v. President and Fellows of Harvard College and Students for Fair Admissions v. University of North Carolina1, as well as the COVID pandemic, which also exacerbated the barriers for underserved, underrepresented students (e.g., students of color and those who are low-income and first-generation) from enrolling in college and persisting through to a degree.
Many public institutions have shifted toward merit-based aid over the last 20 years as part of their strategic efforts to attract academically competitive students, increase enrollments, and, in some cases, attract out-of-state students who pay higher tuition rates (Knox, 2023). And many selective colleges, as part of their enrollment management strategies, have historically recruited the highest achieving students who often come from affluent families. The practice known as “financial aid leveraging” places a premium on student scores that would boost an institution’s ranking rather than focusing on student financial need, even favoring students “…who otherwise can pay full freight and help boost the institution’s bottom line” (Burd, 2024).
This research provides a much-needed update to the literature, examining the distribution of institutional need and merit-based grants by income and race/ ethnicity, in both public and private institutions. We also analyze the change in institutional aid patterns over time, and the remaining need left for families to cover through loans and work earnings. In addition to highlighting the needs of students, this research demonstrates the importance of collecting and using national data to track financial and enrollment trends of students and institutions.
Key Findings
Using the most recent National Postsecondary Student Aid Study2 (NPSAS:20) data, we find that:
1. Higher income students receive more merit-based aid.
• Merit-based grant awards are largest for the highest income students at both public and private four-year institutions. • The highest income students are also the most likely to receive merit-based aid at public institutions.
2. Higher income students receive need-based aid.
• At private institutions, one-quarter of the highest income students receive need-based grants, indicating that some private colleges and universities use a very expansive definition of financial need, one that goes well beyond the definition used for federal Pell Grants and most state need-based grants. In addition, the median need-based grant awards are roughly the same amount for both the lowest and highest income quartiles.
3. White students receive the most merit-based aid.
• Looking at race and ethnicity, White students are more likely than other groups to receive merit-based grants in both sectors, and Black and Latino students are the least likely to receive merit-based grants at public institutions.
4. Merit-based grants have increased significantly more than need-based grants.
• Over the last 20 years, both public and private four-year institutions saw increases in the proportion of students receiving institutional grants, with the exception of need-based grants at private institutions.
• Students also saw increases in the size of median grant awards, even after controlling for inflation — particularly among merit-based grants at private institutions.
5. The lowest income students have the highest unmet need.
• Taking into account student budgets (total cost of attendance including tuition and fees, room and board, books and supplies, and other expenses), grants from all sources, and expected family contribution (EFC), students from families in the highest income quartile have little to no unmet need in both sectors, while those in the bottom half of the income distribution have the highest remaining need.
• The unmet need distribution is particularly noteworthy when considering how grants are distributed. Families in the lowest income quartile have an EFC of 0, meaning they must fill in the remaining gap with loans or work earnings.
• Given the high levels of unmet need identified among the lowest income quartiles, it is unclear how these students are able to pay for the remainder of their budgets. Even after the median loan amount, work earnings, family contributions and grants are taken into account, low-income students at private fouryear institutions still fall short of paying for college and associated expenses.
This analysis focuses primarily on dependent, full-time students attending public and private non-profit four-year institutions, as these students are most likely to receive institutional aid. A separate analysis of independent, part-time students at community colleges shows a similar pattern of high-income and White students having the lowest unmet need. Unfortunately, with shrinking federal support, pressure may be on institutions to seek cost savings through reduced institutional aid expenditures, or to use financial aid more as an enrollment management tool than a college access lever for the neediest students. Cross-campus dialogue is needed to further explore how financial aid can be leveraged in the current environment to increase college access and economic mobility.
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