03 February 2012

What’s The Point of Financial Aid?

I suppose that the original intent of financial aid—most particularly scholarships—was to attract good scholars who would be likely to become famous and thus increase the prestige of the university.  By offering intelligent, driven individuals an opportunity to be educated for reduced rates or for free, universities could be assured that they would attract some number of desirable students, and increase their prestige.  Note that increasing prestige has a tendency to turn into a self-reinforcing feedback loop, which means that increasingly prestigious universities attract increasingly desirable students, thus making the university more prestigious.  As such, universities engage in a sort of arms race to increase their prestige, and thus offer scholarships to scholastically-minded students.

However, the role of financial aid has morphed in recent years to serve as a marketing tool, and functions similarly to a price-sensitivity indicator.*  By this I mean that financial aid is to colleges as coupons are to grocery stores.  The comparison is not perfect, of course, but the general comparison is the same in that both financial aid and coupons both serve to differentiate the price-sensitive from the price-insensitive.

What’s interesting is that both the original function and the modern function of financial aid are both the same:  marketing. The original form, though, is less direct and has a longer time horizon.  The latter is more price-driven.  This suggests that the product has changed in some way.  Assuming that a postsecondary education is a way to signal employability, it should make sense that colleges emphasize affordability in their advertising because the signaling benefit has declined due to the increase in noise.

When only a few people graduate from college, there is likely an appreciable difference in the graduates of different institutions, hence the need for prestige.  However, if a lot of people graduate from college, it will likely be difficult to discern a difference in the graduates of different institutions.  The lesson in all this is that colleges that emphasize prestige in their marketing are colleges that will offer a clear signal of prestige while colleges that emphasize affordability are all likely interchangeable in terms of signal utility.  Therefore, if you aren’t going to a prestigious university, the best course of action is to acquire a college education as cheaply as possible.  And if you can’t a get a cheap college education, you are probably better off skipping college.

* I recall when I was being recruited by various colleges that many would state what percentage of students received financial aid. There were a large number of colleges that claimed that over three-quarters of their students received some sort of scholarship money.

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