Switcheroo Algorithms

Washington -- Last Tuesday at a public hearing at the Maryland statehouse in Annapolis, legislators were taken aback to learn that the scholarships they award to their financially needy student constituents may actually leave the students no better off when paying for college. And they were surprised to find out that it's the same way with private scholarships awarded by organizations such as the Baltimore Foundation and Central Scholarship.

It seems the colleges and universities back out their own grant aid in a like amount and then redistribute it to other, more favored students, or use it for other purposes. This is known as scholarship displacement. Actually, it's been going on for a long time, and not just in Maryland. It happens everywhere. But in Maryland, several state senators and delegates have now introduced legislation to stop the practice.

Opponents of the bills -- Maryland colleges and universities -- threw up smokescreens at the hearing to blame federal regulations for their actions, or to say they don't do scholarship displacement, or to say if they do it, it is because they know better than the donors who needs aid. They were especially opposed to any new law requiring disclosure of the practice, saying that if the practice were disclosed, who would donate to scholarship funds?

It was a shameful performance by the opponents. There are no federal regulations requiring scholarship displacement as it is practiced. It is a rare instance where a student would have so much grant aid that loans and work-study could not be reduced to comply with any federal regulations against grant overaward situations. Of course donors would stop giving if these displacement practices were widely known, so why not change the practices rather than jeopardize scholarship giving? It is as if colleges want to see everyone possible burdened with loans.

One opponent conceded that the scholarship displacement practice is widespread and gave a reason why colleges do it. Colleges must send students financial aid packages in time for students to make a decision as to whether they can afford to enroll. Often the packages include institutional grant aid that the colleges plan on withdrawing if the student later brings scholarship awards to help pay the bills. The colleges are therefore taking a risk with their own money to get a student to enroll. In exchange for taking this risk on behalf of students, the colleges feel entitled to pull their institutional funds back whenever they can. But to manage the risk that students won't be bringing in a local civic club or a charitable foundation scholarship, colleges develop complicated algorithms to predict how much money they can recover through their now-you-see-it-now-you-don't displacement practices. (Before anyone is tempted to conclude that the colleges should be entitled to a risk premium for their actions, they should consider that these risks are also typically covered by the same shell-game used to displace federal student grant funds, especially Pell grants, which research has shown are also vulnerable to displacement.)

Moreover, these algorithms are typically part and parcel of elaborate enrollment management plans to improve the prestige rankings of the institutions, which often are a much higher priority than holding down student debt. The plans use techniques such as "aid-gapping" less desirable students to discourage them from enrolling, shifting institutional aid to "merit" awards to enroll more desirable non-needy students, and the latest technique, "drowning the bunnies," one college president's description of his effort to get weaker students to drop out before they can be counted in retention rate statistics favored by those who award coveted prestige. Dare we ask how much these switcheroo algorithms are contributing to growing socioeconomic and racial inequalities that are identified by researchers as being linked to student debt?

Solutions are available. One is to pass the Maryland legislation. Another is for Maryland legislators to provide more state money for need-based student aid, so colleges do not have to rob Peter to pay Paul under the table. Another is for the federal government to re-balance more of its student aid spending toward SEOG and other matching programs, so that colleges that do not displace scholarships but use their institutional aid to reduce student debt would be rewarded with more funding. Yet another is for the Secretary of Education to require colleges to disclose their financial aid distribution practices under the Student Right to Know Act. Making the colleges honest would be doing right by all scholarship donors who only want to help relieve needy students of debt, a most worthy cause.