Universities and colleges are giving $5.3 billion in aid this year to students who the federal government says don't need financial help, according to figures from the College Board.
An additional $4 billion in federal tuition tax credits went to families making $100,000 to $180,000 - at least double the median income for U.S. households.
The schools use the money - more than 20% of all U.S. financial aid - to compete for applicants who have high grade-point averages and SAT scores. Some discounts serve another purpose: They lure high-income families that can write a check for the rest of the tuition.
The strategy is not unlike department stores that use discounts to encourage customers to spend. "Giving $5,000 against a $25,000 tuition charge is just like the discounting you'd see in a retail operation to bring traffic to the door," says Jonathan Burdick, dean of financial aid and admissions at the University of Rochester.
Elite universities such as Harvard, Yale and Stanford give aid to families earning as much as $200,000, which less-selective schools say puts pressure on them to also offer grants to higher-income families. Education experts say such subsidies mean less help for lower- and middle-income students, who fall deeper into debt to pay tuition.
The share of financial aid going to low-income students has declined steadily over the past 10 years, and two-thirds of students borrow to pay for college. The Project on Student Debt, a research group that tracks borrowing for college, reports that students graduate owing an average of $25,250. "We've raised tuition tremendously, and we are giving a lot of the money to people who could be fine without it," says Sandy Baum, a higher-education analyst who collected the statistics for the College Board, an association of colleges that administers the SAT.
Baum found that colleges and universities awarded $5.3 billion worth of grants to families beyond what they qualified for under the federal government's definition of financial need, which is based on income, assets and the cost of the institution a student chooses to attend.
Families with incomes up to $180,000 also get tax breaks toward tuition under the American Opportunity Tax Credit. The credit cost $14.7 billion in 2009, the most recent data available - twice what it cost in 2008.
"That's money that goes to students either who have no financial need, or who already have grant aid to meet that need," Baum said. "They're not giving [money] only to students who can't afford to pay."
"It just doesn't make any sense," said Chris Ogren, 20, a junior at New York University, who has come to the financial aid office for the fifth time in two days to sort out a problem with his $45,000 worth of student loans. "You don't give the bloated guy the cheeseburger when the starving man is starving."
One reason universities do this, according to financial aid directors and observers, is to vie for applicants with good grades and high test scores, who often come from affluent communities with top-rated school systems.
"If they want to increase their rankings in U.S. News & World Report, an easy way to do that is to bribe high-scoring students to come to your university with non-need-based aid," said Richard Kahlenberg, a specialist in education at the Century Foundation.
Universities say they have been forced to pay out more to people who don't need it since Harvard, Yale, Stanford and other elite schools started waiving tuition altogether for families that earn as much as $130,000 in a battle for cream-of-the-crop students.
Families making as much as $200,000 pay an amount equal to no more than 15% of their income. That competition - Brown Admissions Dean Jim Miller calls it "the war between the haves and the have lots" - has put pressure on less-selective colleges, already contending with huge budget cuts and endowment shortfalls, to give support to families that don't necessarily need it, Burdick said.
"What it has done," Burdick said, "is fuel a situation where families with high incomes are moving to the best bidder."