The increasing use by private colleges and universities of financial aid based on “merit”, as opposed to based solely on financial need has caused many to raise concerns that this type of aid will go mainly to higher income students crowding out aid to lower income students. However, some analysts suggest that by attracting more “almost full-paying” students through the use of merit aid, institutions will have more financial resources that they can use to increase their financial aid to low-income students and thus their enrollment. Results using data from the College Board’s Annual Survey of Colleges and other secondary data sources suggest that the increased use of merit aid is associated with a decrease in enrollment of low-income and minority students, particularly at more selective institutions. Additionally, this paper examines how institutions may be diverting financial resources to fund merit aid awards, such as through the increased use of part-time faculty, increases in tuition or fees, or smaller increases in faculty salaries. For middle and bottom tier colleges a merit aid policy is accompanied by an increase in tuition. Top tier colleges experience decreases in faculty salaries after the introduction of a merit aid policy, and bottom tier colleges see increases in salaries
