Wednesday, October 19, 2005

Why pay smart kids to go to college? 

This morning's Chronicle of Higher Education contains an article (subscriber link) reporting on the College Board's 2005 editions of Trends in College Pricing and Trends in Student Aid. (Those reports are freely available.) One highlight of the latter report is the increasing use of merit-based student aid.

At the news conference, many higher-education officials criticized institutions that offer merit-based aid because, they said, the incentive tends to benefit students who would make it through college anyway.

By essentially paying smart students to attend a particular college, those institutions waste money that could be used to help students who really need it, said Amy Gutmann, president of the University of Pennsylvania.

William E. Kirwan, chancellor of the University System of Maryland, agreed.

"We have reached an indefensible point where a low-income, high-ability student is no more likely to attend college than a low-ability, high-income student," he said. "Institutions need to get their houses in order."

Is there any reason to pay smart students to attend your college? Sure, since the revenue the school receives from a student continues through the alumni-university relationship. This matters in two ways. First, the parents of wealthy students become a source of contributions, either directly or indirectly through the student's inheritance. Secondly, there is evidence in the economics of education literature (for example, see Baade and Sundberg) that the quality of the institution matters for gaining donations from alums. So if you have attracted better students through a merit-based scholarship, you can advertise that to your alums to get more gifts.

The other aspect of this discussion is that benefits accrue to middle- and higher-income families through the tax system (for education tax credits and deductions, and the tax-preferred status of 529 plans) because they pay the taxes. I find it highly unlikely that universities want these tax preferences ended; they simply want more of the federal budget thrown into Pell grants and other federal need-based aid, which allows them to increase headline tuition prices further.