Higher education industry in America faces challenges Discussion i need the answer to only discuss in blackboard. it should be one page. no need to write

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The Higher education industry in America faces a number of challenges. One of the major such challenges is the rising cost of a bachelors degree from a four-year institution. While it is clear tuition at public universities is lower than at private, the cost of a four-year college education is beyond the reach of most Americans. The upcoming class readings are focused on three approaches to address the high cost of an education with each approach being separate and apart from the other. In the first reading, Dynarski explores merit aid, the discounting of college tuition based on academic achievement or merit. Merit aid has been present in higher education for some time in several different forms. At the time of her research thirteen states had some type of merit program. While this may appear to be a small number but this is a six-time increase from 1999. Dynarski research highlighted one particular state merit program. Georgia’s Helping outstanding pupils educationally (HOPE) program was created by the Governor and the state legislature funded by the Georgia state lottery program. The HOPE program as evidenced by Dynarski’s research did have a positive impact on increasing the number of students going to college. As our class attempts to understand the public policy effects on higher education, do you think more states should have programs like the HOPE? And more importantly, how does one get these programs started? This PDF is a selection from a published volume from the
National Bureau of Economic Research
Volume Title: College Choices: The Economics of Where
to Go, When to Go, and How to Pay For It
Volume Author/Editor: Caroline M. Hoxby, editor
Volume Publisher: University of Chicago Press
Volume ISBN: 0-226-35535-7
Volume URL: http://www.nber.org/books/hoxb04-1
Conference Date: August 13-15, 2002
Publication Date: September 2004
Title: The New Merit Aid
Author: Susan Dynarski
URL: http://www.nber.org/chapters/c10098
The New Merit Aid
Susan Dynarski
2.1 Introduction
Merit aid, a discount to college costs contingent upon academic performance, is nothing new. Colleges and private organizations have long
rewarded high-achieving, college-bound high school students with scholarships. For example, the privately funded National Merit Scholarship
program, established in 1955, annually awards grants to 8,000 entering college freshmen who perform exceptionally on a standardized test. Private
colleges have long used merit scholarships to lure students with strong academic credentials.
While merit aid has a long history in the private sector, it has not played
a major role in the public sector. Historically, government subsidies to college students have not been merit based. At the federal level, aid has been
need based and strongly focused on low-income students. Eligibility for the
two largest federal aid programs, the Pell Grant and Sta?ord Loan, is determined by a complex formula that defines financial need on the basis of
income, assets, and family size. The formula is quite progressive: 90 percent
of dependent students who receive federal grants grew up in families with
incomes less than $40,000.1
At the state level, subsidies for college students have historically taken
the form of low tuition at public college and universities. Most states have
Susan Dynarski is Assistant Professor of Public Policy at the John F. Kennedy School of
Government, Harvard University, and a faculty research fellow of the National Bureau of
Economic Research.
Andrea Corso, Vanessa Lacoss-Hurd, Maya Smith, and especially Betsy Kent provided excellent research assistance. Support from the Kennedy School of Government, the Milton
Fund, and the NBER Non-Profit Fellowship is gratefully acknowledged.
1. Calculated from data in National Center for Education Statistics (1998a, table 314).
Susan Dynarski
long had some form of merit aid, but these programs have traditionally
been small and limited to the most elite students. For example, New York
rewards each high school’s top scorer on the Regents exam with a scholarship. While such small merit programs abound, the vast bulk of state
spending on higher education takes the form of low tuition, made possible
by the $50 billion in subsidies that states annually provide their postsecondary institutions. These institutional subsidies are highest at the flagship
universities, which draw the highest-achieving students. In this sense, these
institutional subsidies are, by far, the largest “merit aid” program in the
United States. Access to this state subsidy has traditionally been controlled
not by state governments but by the schools, who decide which students are
su?ciently meritorious to gain admission.
Recently, however, state legislatures have gotten into the business of
defining academic merit and awarding merit aid to hundreds of thousands
of students. Since the early 1990s, more than a dozen states have established broad-based merit aid programs. The typical program awards tuition and fees to young residents who have maintained a modest grade
point average in high school. Many require a high school grade point average (GPA) of 3.0 or above, not a particularly high threshold: In 1999, 40
percent of high school seniors met this standard.2 Georgia, for example,
gives a free ride at its public colleges and universities to residents who have
a GPA of 3.0 in high school.3 In Arkansas, the GPA cuto? is 2.5, exceeded
by 60 percent of high school students.
This new breed of merit aid di?ers from the old style in both its breadth
and, plausibly, its e?ect on students’ decisions. The old style of merit aid
was aimed at top students, whose decision to attend college is not likely to
be contingent upon the receipt of a scholarship. By design, if not by intent,
this elite form of merit aid goes to students whose operative decision is not
whether to attend college, but which high-quality, four-year college to
choose. By contrast, the new, broad-based merit aid programs are open to
students with solid although not necessarily exemplary academic records.
Such students may be uncertain about whether to go to college at all. When
o?ered a well-publicized, generous scholarship, some of these students
may decide to give college a try. Even among students who would have
gone to college without the scholarship, the incentives of merit aid may
have an e?ect on schooling decisions. For example, some may choose a
four-year school over a two-year school, or a private school over a public
2. As I will discuss later in the paper, this figure varies quite dramatically by race and ethnicity. Source: Author’s calculations from the 1997 National Longitudinal Survey of Youth
(NLSY). This is the share of students with a senior year GPA of at least 3.0 and so is probably
an upper bound on the share of students who achieve this GPA for their entire high school career. Unfortunately, NLSY does not contain GPA data for the entire high school career.
3. As the paper will discuss, the merit programs require that a high level of academic performance be maintained in college. In Georgia, a GPA of 3.0 must be maintained in college,
a considerably higher hurdle than a 3.0 in high school.
The New Merit Aid
school.4 Those students planning to go to college out of state may instead
decide to stay closer to home in order to take advantage of a merit scholarship.
This chapter will examine how merit aid a?ects this array of schooling
decisions, using household survey data to measure the impact of the new
state programs. I start with a case study of the Georgia Helping Outstanding Pupils Educationally (HOPE) Scholarship, the namesake and inspiration of many of the new state programs. I then extend the analysis to other
states that now have broad-based, HOPE-like programs. In the empirical
analysis, I pay particular attention to how the e?ect of merit aid has varied
by race and ethnicity.
Merit aid might a?ect the decisions not only of students but also of institutions. Do colleges increase their tuition prices, in order to capture
some of the subsidy? Do they reduce other forms of aid? Does the linkage
of scholarships to grades lead to grade inflation at high schools and colleges? A number of studies have addressed these questions, and I will review the evidence on these topics. Finally, I will briefly discuss the political
economy of merit aid. Why has it arisen where it has and when it has? What
are the prospects for its continuation and growth, given the current, poor
fiscal prospects of the states?
2.2 State Merit Aid: A Primer
Broad-based state merit aid became common in a very short span of
time. In 1993, just two states, Arkansas and Georgia, had programs in
place. By 2002, thirteen states had introduced large merit aid programs.
Most of this growth has occurred quite recently, with seven programs starting up since 1999. As is clear from the map in figure 2.1, merit aid is heavily concentrated in the southern region of the United States. Of the thirteen
states with broad-based merit aid programs, nine are in the South. Table
2.1 summarizes the characteristics of the thirteen broad-based merit programs. As was discussed earlier, dozens of states have some form of merit
aid in place. The state programs detailed in table 2.1 were chosen because
they have particularly lenient eligibility criteria, with at least 30 percent of
high school students having grades and test scores high enough to qualify
for a scholarship.5
4. Two-year colleges are generally cheaper than four-year colleges. Most merit aid programs make them both free.
5. The eligibility estimates are based on national data from the NLSY97. Many of the states
listed in table 2.1 do not have enough observations in the NLSY97 to allow state-specific estimates of the share of students whose GPA qualifies them for their state’s merit program. For all
states, therefore, I use the national grade distribution to impute the share in a state that meets
the eligibility criteria. When available, state-level data on the ACT and SAT are used to measure the share of students who meet these criteria. Note that these estimates are used only to
choose the merit programs to be analyzed; they are not used in the paper’s regression analyses.
Susan Dynarski
Fig. 2.1
States with broad-based merit aid programs
For example, the Arkansas award requires a GPA of 2.5, a standard met
by 60 percent of high school students nationwide. The state also requires a
minimum on the American College Test (ACT) of 19, a score exceeded by
60 percent of test takers nationwide and well below the Arkansas state average of 20.4. Five other states, like Arkansas, condition eligibility on a
minimum GPA and test score. Six states use only GPA to determine eligibility. Of the states that require a minimum GPA, four require a GPA of 3.0,
while two make awards to those with a GPA of 2.5.
Only one state—Michigan—bases eligibility solely on standardized test
performance. For the class of 2000, 31 percent of Michigan students had
test scores su?ciently high to merit an award. However, this overall eligibility rate masks substantial heterogeneity: Just 7.9 percent of African
American students met the Michigan requirement. Civil rights groups
have protested that this wide gap in eligibility indicates that Michigan’s
achievement test is an inappropriate instrument with which to determine
New Mexico
South Carolina
West Virginia
initial: 2.5 GPA 1st semester of college
renew: 2.5 college GPA
initial: 3.0 GPA and 1100 SAT/24 ACT
renew: 3.0 college GPA
initial: 3.0–3.75 GPA and 890–1280 SAT/19–29 ACT
renew: 3.0 college GPA
initial: 3.0 HS GPA in core and 1000 SAT/21 ACT
renew: 2.75–3.0 college GPA
initial: 3.0 GPA and pass Nevada HS exam
renew: 2.0 college GPA
initial: 2.5 GPA in HS core and 19 ACT
renew: 2.75 college GPA
initial: 3.0–3.5 HS GPA and 970–1270 SAT/20–28 ACT
renew: 2.75–3.0 college GPA
initial: 3.0 HS GPA
renew: 3.0 college GPA
initial: 2.5 HS GPA
renew: 2.5–3.0 college GPA
initial: 2.5–3.5 HS GPA and ACT state mean
renew: 2.3 college GPA
initial: 3.0 HS GPA in core
renew: 3.0 college GPA
initial: level 2 of MEAP or 75th percentile of SAT/ACT
renew: NA
initial: 2.5 GPA and 15 ACT
renew: 2.5 college GPA
Note: HS high school.
Amount of award rises with GPA and/or test score.
Merit Aid Program Characteristics, 2003
Table 2.1
public: $2,500
private: same
public: 75–100% tuition/feesa
private: 75–100% average public tuition/feesa
public: tuition/fees
private: $3,000
public: $500–3,000a
private: same
public: tuition/fees $400–800a
private: average public tuition/feesa
2-year school: $1,000
4-year school: $3,000
in-state: $2,500 once
out-of-state: $1,000 once
public freshman/sophomore: $500
public junior/senior: $1,000
private: same
public 4-year: tuition/fees (max $2,500)
public 2-year: tuition/fees (max $1,900)
private: none
public: tuition/fees
private: none
2-year school: $1,000
4-year school: $2,000
2-year school: tuition/fees ($1,500–2,500)a
4-year school: tuition/fees ($3,000–4,000)a
public: tuition/fees
private: average public tuition/fees
Award (in-state attendance only, exceptions noted)
Susan Dynarski
eligibility for a state-funded scholarship. Similar objections were raised in
Arkansas, which initially based eligibility for its program only on performance on standardized tests but later broadened the criteria to include
academic performance in high school.
These controversies point to a shared characteristic of merit programs:
their scholarships flow disproportionately to white, non-Hispanic, upperincome students. One reason is that blacks, Hispanics, and low-income
youths are relatively unlikely to attend college, so any subsidy to college
students will flow disproportionately to white, upper-income youth. But
even among those nonwhite, Hispanic, and low-income youths who do attend college, academic performance is a barrier to merit aid eligibility.
For merit programs that are based on standardized tests, it is unsurprising to see (as in Michigan) a large gap in the eligibility rates of whites and
African Americans, as the correlation between standardized test performance and race is well documented. However, even those programs with
only a GPA cuto? will experience large racial di?erences in eligibility, since
academic performance in the classroom varies considerably by race and
ethnicity. Forty percent of high school seniors have a 3.0 GPA or higher,
while only 15 percent of African Americans and Hispanics meet this standard. Further, blacks and Hispanics receive relatively low grades in college,
which threatens their ability to keep any merit scholarship they are able to
win with their high school grades.
Since nonwhite youths are less likely to qualify, it is plausible that merit
aid programs will have little positive impact upon their college attendance.
Further, if the new merit aid crowds out state spending on need-based aid
or leads to higher tuition prices, the programs may actually decrease lowincome, nonwhite college attendance, since these populations will face the
resulting cost increases but will be disproportionately ineligible for the new
merit scholarships. Merit aid would therefore tend to widen existing gaps
in college attendance, as it flows to those who already attend college at the
highest rates. A countervailing force is that blacks and Hispanics may be
relatively sensitive to college costs. Among those blacks and Hispanics who
are eligible, a merit program could have a relatively large impact on schooling decisions. It is therefore an empirical question, to be investigated by
this chapter, whether merit programs narrow or widen existing racial and
ethnic gaps in postsecondary schooling.
2.3 Case Study: The Georgia HOPE Scholarship
In 1991, Georgia Governor Zell Miller requested that the state’s General
Assembly consider the establishment of a state-run lottery, with the proceeds to be devoted to education. The Georgia General Assembly passed
lottery-enabling legislation during its 1992 session and forwarded the issue
to voters, who approved the required amendment to the state’s constitution
The New Merit Aid
in November of 1992. The first lottery tickets were sold in June of 1993.
$2.5 billion in lottery revenue has flowed into Georgia’s educational institutions since 1993. The legislation and amendment enabling the lottery
specified that the new funds were not to crowd out spending from traditional sources. While it is not possible to establish conclusively that such
crowdout has not occurred, spending on education has risen substantially
since the lottery was initiated, both in absolute dollars and as a share of total state spending. Roughly equal shares of lottery funds have gone to four
programs: the HOPE Scholarship, educational technology for primary
and secondary schools, a new pre-kindergarten program, and school construction.
Residents who have graduated since 1993 from Georgia high schools
with at least a 3.0 GPA are eligible for HOPE.6 Public college students must
maintain a GPA of 3.0 to keep the scholarship; a similar requirement was
introduced for private school students in 1996. The HOPE Scholarship
pays for tuition and required fees at Georgia’s public colleges and universities. Those attending private colleges are eligible for an annual grant,
which was $500 in 1993 and had increased to $3,000 by 1996. A $500 education voucher is available to those who complete a General Education
Diploma (GED). The first scholarships were disbursed in the fall of 1993.
Participation in HOPE during its first year was limited to those with family incomes below $66,000; the income cap was raised to $100,000 in 1994
and eliminated in 1995.
Two administrative aspects of HOPE di?erentially a?ected low- and
upper-income youths. Since income is highly correlated with race and ethnicity, these administrative quirks may explain any racial and ethnic heterogeneity we observe in HOPE’s e?ect. First, until 2001, HOPE awards
were o?set by other sources of aid. A student who received the maximum
Pell Grant got no HOPE Scholarship except for a yearly book allowance
of $400.7 Insofar as blacks and Hispanics are disproportionately represented in the ranks of those who receive need-based aid, their HOPE
awards would have been reduced more frequently than those of their white,
non-Hispanic peers. Second, also until 2001, students from families with
low incomes faced a more arduous application process for HOPE than did
other students. Georgia education o?cials, concerned that students would
forgo applying for federal aid once the HOPE Scholarship was available,
6. The high school GPA requirement is waived for those enrolled in certificate programs at
technical institutes. For high school seniors graduating after 2000, only courses in English,
math, social studies, science, and foreign languages count toward the GPA requirement.
7. As a result of this provision and the scaling back of the state’s need-based State Student
Incentive Grants (SSIGs), some low-income students have actually seen their state aid reduced since HOPE was introduced (Ja?e 1997). This contemporaneous shift in SSIG spending has the potential to contaminate the paper’s estimates. However, SSIG spending was so
miniscule—$5.2 million in 1995, before the program was scaled back—that the impact of its
elimination on the estimates is likely to be inconsequential.
Susan Dynarski
mandated that applicants from families with incomes lower than $50,000
complete the Free Application for Federal Student Aid (FAFSA). The rationale for the $50,000 income threshold was that few students above that
cuto? were eligible for need-based, federal grant aid.8 The four-page
FAFSA requests detailed income, expense, asset, and tax data from the
family. By contrast, those with family incomes above $50,000 filled out a
simple, one-page form that required no information about finances other
than a confirmation that family income was indeed above the cuto?. As a
consequence of the two provisions just discussed, low-income students
faced higher transaction costs and lower average scholarships than did upper-income students.
In 2000–2001, 75,000 students received $277 million in HOPE Scholarships. Georgia politicians have deemed HOPE a great success, pointing to
the steady rise in the number of college students receiving HOPE. The key
question is whether the program actually changes schooling decisions or
simply subsidizes inframarginal students. In the next section, I discuss the
data and empirical strategy I will use to answer this question.
2.4 Data
Any empirical analysis of state financial aid policy quickly comes face to
face with frustrating data limitations. The data requirements appear minor, since eligibility for merit aid is determined by a very short list of characteristics: state of residence at the time of high school graduation, high
school GPA, standardized test score, and, in some states, parental income.
In order to use this information in an evaluation of the e?ect of merit aid,
we woul…
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