Over recent decades the role of financial aid in higher education has broadened from a traditional focus on providing opportunities for intergenerational mobility in income and wealth. It is now used also as a strategic tool by some colleges and universities to enhance the academic quality of the student body, to promote a diverse student population, and to strengthen the short-run financial condition of the institution. The College of Arts & Science is particularly interested in improving the academic quality of its undergraduate students and enhancing the racial, geographic, and economic diversity of the student body.

     There are two types of financial aid: merit and need-based. Merit aid is awarded without regard to the financial situation of students or their families. It includes awards for academic, athletic, musical, or other types of achievement, as well as assistance to particular categories of students. Need-based aid is awarded to admitted students without regard to merit (other than that sufficient for admission). It is comprised normally of grants, loans, and work-study opportunities, and traditionally an expectation of a contribution from students and/or their families.

     Colleges and universities that are "need-blind" in admissions are more attractive to applicants. To remain need-blind, the institution must provide all admitted students with a financial aid package that allows them to attend Vanderbilt. An institution does not have to offer an equal mix of grants, loans, and work-study opportunities to remain need-blind, however. "Preferential packaging" for students with stronger academic credentials is widespread. The distinction between need-based aid and merit aid is thus not sharp.

     The College of Arts & Science offers both types of financial assistance. Merit aid is used primarily to shape the character of the undergraduate student population. Academic merit awards, in particular, are aimed at attracting students with truly superior academic potential. The justification for such awards rests largely on a belief in strong peer-effects in learning. Outstanding students also enhance faculty recruiting. The basic goal of need-based aid is to allow excellent students who could not otherwise afford Vanderbilt to attend. Need-based aid attracts students from diverse economic backgrounds.

     Over the past twenty years, academic merit aid has evolved into an arms race, with more and more institutions offering increasingly generous merit-based grants. The arms race now is migrating to need-based aid. Princeton, for example, recently eliminated loans from need-based aid packages. Harvard and Yale have responded by increasing the grants in their need-based aid packages. In long-run equilibrium, financial aid arms races accomplish little other than redistributing income to targeted groups (e.g., academically talented students) because enhanced aid packages from one institution often trigger matching responses from competitors. Competition for the top students is largely a zero-sum game. To the extent that merit awards succeed in achieving their goals for a particular institution, they attract a student population with a strong preference for financial rewards.

     In some cases, Vanderbilt need-based financial aid packages currently contain an average loan component in excess of the packages offered by our direct competitors. Need-based awards at Vanderbilt also contain an expected contribution from students and/or their families, some part of which may be less visible because it derives from a "cost-to-attend" figure below what aid recipients need to spend to fit in comfortably with other Vanderbilt students. Loans and expected student and/or family contributions that are less competitive than those offered by direct competitors may affect who applies to Vanderbilt and who among the admitted students receiving need-based aid offers decides to attend.

     Even if our offers are "competitive," substantial reliance on students' and their families' financial contributions may contribute to attrition at Vanderbilt because a considerable proportion of our undergraduate students appear to have few financial constraints. Students on need-based aid who must survive on a limited budget may be unable to participate in typical student activities to the extent they wish, and therefore may feel socially stigmatized.

     Vanderbilt does particularly well in attracting undergraduates from the population of those with SAT scores exceeding 1320 and coming from families with annual income exceeding $100,000 (we enroll 3 percent of such students nationally). It does particularly poorly in attracting students from among those with SAT scores exceeding 1320 and coming from families with income less than $100,000 annually (we enroll only 0.3 percent of such students nationally). Because of these different rates of success and because the latter group is much larger than the former group, there is a greater opportunity for effectively using additional financial aid resources to improve the academic quality of future classes if funds are devoted to improving the attractiveness of need-based awards to students with strong academic credentials.

     Vanderbilt appears to fare rather poorly in terms of enrolling "middle-class" students from families in the $40,000 to $100,000 annual income category. This implies a greater opportunity to attract academically strong students from this socio-demographic group with enhanced financial aid awards.

     Accordingly, we support an effort to reduce the family and student contribution and the amount of borrowing expected of students on need-based financial aid. Harvard has just announced a move in this direction by adding a $2,000 grant to all of its need-based awards. For academically strong students a reduced family and student contribution, and a reduction in loan assistance offered should be replaced by increased grant. Such a strategy is less expensive for Vanderbilt today than for most of its competitors because of Vanderbilt's current relatively low proportion of students on need-based aid.

     Less reliance on family and student contributions and on loan assistance implies larger cash grants for need-based aid students. Such a change should increase matriculation rates among needy admitted students, leading to a larger share of the student population on financial aid, and increased need-based financial aid costs. Calculating that cost is important, but is beyond our capabilities here.

     If some part of family and/or student contributions and loan assistance is replaced by grants for all admitted students who are eligible for need-based aid, the yield rate on all needy students should rise. The goal, however, is to increase Vanderbilt's matriculation rate from its current 0.3 percent of the potential student population with SAT's exceeding 1320 and family incomes of less than $100,000, not to increase the matriculation rate from any and all students from families with annual incomes less than $100,000.

     Consequently, we endorse enhancing grant aid in need-based awards conditional on academic credentials. Such a policy effectively adds a merit aspect of aid on top of baseline need-based financial assistance. To implement this "merit in addition to need" approach, we recommend an aggressive effort to reduce loans and expected student and family contributions in the aid packages of prospective needy students who are predicted to be above average academic potential. For various reasons (work experience, federal government subsidization, responsiveness to student financial need) we believe that work-study opportunities should continue to play a significant role in most need-based financial aid packages. Work study opportunities are particularly valuable when the required tasks enhance the learning experience of students.

     Quietly increasing grant assistance to high academic potential need-based students has the advantage of broadening the economic diversity of the undergraduate population without sacrificing academic quality. It can accomplish this objective at reasonable financial cost because need-based aid students are likely to be relatively responsive to modestly more generous financial aid awards. This financial aid strategy responds to the more generous aid packages being offered by more prestigious universities in a focused, low profile manner that should not exacerbate the arms race. It should help to attract talented students who have financial need, but do so in a way that remains affordable to the University, is unlikely to provoke significant responses by competing institutions, and makes Vanderbilt more accessible to students from lower and middle income families.

John Siegfried
Jerry Christensen

February 28, 2001