Are Transfer Colleges Cheating in Granting Scholarships?

by Chad Agrawal

transfer-student-tuitionIt's no secret that the costs of higher education are rising. For the 2013-14 school year, the average cost of living on campus and going to an In-State school is estimated to be just under $23,000. For a four-year private school, the cost will be just under $45,000. Beginning in 2003, the increase in college tuition and fees for a four-year education has outpaced inflation by anywhere from 0.5% to 9.5%. To say the least, college is expensive.

Many transfer students make up a portion of their tuition through scholarships. They are the lifeblood of the college transfer hopeful and all but mandatory for most students who want to avoid loans as much as possible. Unfortunately, it has come to light that many transfer colleges are devoting a majority of their scholarship monies to wealthier students, which is to say students who might have an easier time paying out-of-pocket than their classmates. Why is it that schools are targeting wealthier students and how serious is the problem?

Scope of the Issue

According to a slew of articles published by USAToday, Bloomberg Businessweek, CBS Money Watch, and ABC News, colleges are shifting aid from poor to wealthy students at an alarming rate. As far back as 2004, USAToday reported that while 66% of high-income students were likely to go to college, only about 20% of low-income students were likely to attend. Put another way, a random selection of students from the average U.S. university will produce students whose families are in the top 25% in terms of income at a rate 25 times that of students whose families are in the bottom 25% in terms of income. The reason for this discrepancy is cost.

The problem of cost and rising fees has been exacerbate in recent years by two changes. The first change has occurred at the level of government aid. The U.S. government has shifted from primarily offering grants to favoring loans. Loans present two problems. First, they are less likely to be accessible by low-income families, especially now that the average interest charged has increased from a variable rate of 2-3% to a fixed rate of nearly 7%.

The second problem that loans present is that they sap money from grant programs. In the 1970's, federal Pell Grants for low-income families covered about 40% of the cost of an average four-year education. Today, a Pell Grant covers only 15% of total costs. The shift from grants to loans is taking a disproportionately large toll on lower-income college hopefuls.

The other, more recent problem to affect low-income families is a shift in how colleges award scholarships. According to information from ProPublica, scholarship awards to students in the lowest income quartile have shrunk from 34% in 1996 to 25% in 2012. Over the same time frame, awards to students in the highest quartile of income have increased from 16% to 23%.

When combined, the above two shifts in how money is awarded have had a tremendous impact on low-income families. To put the changes into perspective, consider Businessweek's report showing that 35% of low-income families get an average of $7,237 in scholarships while 36% of high-income families get an average of $10,213 in scholarships (grants are not included in these numbers). College costs are not only increasing overall, they are increasing at a disproportionate rate based on income. The rate of rise in costs is substantially greater for low-income compared to high-income families.

Root Cause

The cause of this shift can be traced back several decades to the advent of college ranking systems that depend heavily on graduation rates, GPA, etc. Transfer colleges compete fiercely with one another to maintain these rankings because they drive everything from money to prestige. In such a setting, investing a lot of resources in one student is less beneficial than investing few resources in a lot of students. In other words, colleges need to increase prestige and it is cheaper to do that with high-income students than with low-income students.

Offering money to high-income students allows transfer colleges to pick up a large number of high-caliber students because the investment, per student, is lower. Catharine Hill, the president of top-ranked Vassar College, has spoken out against colleges that use merit aid to attract talented middle- and upper-income families simply because it is less costly than pursuing similar prospects from poor families. According to Hill, Vassar takes a different approach to education and makes a concerted effort to uphold "our nation's commitment to equal opportunity and social mobility." As a result, Vassar offers some of the best incentives in the nation to low-income students.

Stepping Up

The good news is that Vassar is not alone in working to make education affordable. According to Bloomberg Businessweek, many colleges, like Amherst and Grinnell, pride themselves in making their educations as affordable as possible for everyone. On average, low-income students at Vassar pay only about $5,700 per year. At Amherst and Grinnell, low-income students pay almost nothing.

Another bit of good news has to do with scholarships. Private scholarships (those that are not awarded by colleges) tend to be awarded using more egalitarian means of assessing merit and need. Private scholarships, like those awarded by Kevin Kerekes, can be more attainable for low-income students because the people awarding them are not interested in padding institutional rankings.

What to Do

When choosing a transfer college, look carefully at Pell Grant awards. This information will provide a good barometer of how much need-based aid these colleges offer and how socially minded they are in awarding scholarships. Beyond that, consider that rank often has very little to do with the quality of the education that an institution provides. In fact, ranking may say more about scholarship opportunities than it does about the quality of the education provided. Whatever the value of rankings, focus first on colleges that work hard to make an education affordable and look for private scholarships to help fund your education.

About The Author

Peter Miles writes about investing and real estate. Spending much of his career as an investor, he's now retired to the eastern coast with his wife and three kids.

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This post was written by Chad Agrawal

Chad Agrawal is the founder of CCTS, helping students transfer from community college to Ivy League, tier 1 or anywhere else by following this community college guide.

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