While some budget-strapped public universities have been cutting merit-based financial aid to preserve money for needy students, a growing number of private colleges are trying to lure students by giving them financial rewards for their talents and hard work.

In all, 36 percent of private colleges reported handing out at least some free money to students who didn't qualify as needy in 2008 (the latest year for which data is available), up from 31 percent in 2003, says Donald Heller, a Pennsylvania State University professor who studies colleges' aid practices. Fully half of the scholarship dollars handed out by private colleges are awarded based on student merit, not financial circumstances, up from about a third in 1995. And several private college administrators tell U.S. Newsthat their merit budgets have risen this year.

Of course, many colleges are simply putting merit aid labels--impressive sounding names such as "Presidential Scholarship"--on aid they award to students who need help to pay for college. A recent survey by the National Association of College and University Business Officers found that private colleges awarded 41 percent of their scholarship dollars solely on a student's merits. But another 22 percent of the scholarships went to students based on both their financial needs and their academic merits. A U.S.News & World Report analysis of colleges' 2009 financial aid reports shows that many colleges are handing out true merit scholarships--to students who don't qualify as "needy"-- to more than a third of their students.

Heller and many other researchers have been critical of colleges' tendency to hand out more and bigger merit scholarships. Some of these colleges end up giving money to rich students whose parents could afford college, while stinting low-income students who then end up having to borrow or drop out, Heller notes. But college officials argue that reducing merit aid would hurt students from all socioeconomic classes.

Here are some examples of colleges that hand out lots of merit aid, and some of their reasons for doing so:

1. To attract and encourage good students. The traditional reason for merit aid is behind most scholarships. "We're trying to attract the strongest students academically," says Don Honeman, dean of admissions and financial aid at Clark University in Worcester, Ma. Clark gave merit-based scholarships to 60 percent of its students this year, and most of those students did not qualify as needy. Clark increased the number of $3,000 merit grants the school awards to solid--but not stellar--students, and enrolled an extra 80 freshmen this fall, he says. If Clark remains similarly popular next year, Clark may tighten its admissions offers a little, he says.

2. To execute philanthropists' requests. Peter Cooper, a 19th Century self-made inventor and industrialist (he organized the first transatlantic cable and invented JELL-O), founded Cooper Union , in New York City, to provide a tuition-free college education. The school offers full-tuition scholarships to all admitted students, no matter how rich or poor.

3. To compete with low-priced public universities or generous private colleges.Hawai'i Pacific University , for example, recently changed its financial aid policies to give many more students merit awards. Instead of handing out a few $10,000 awards to lure top students, it now hands out smaller merit awards--ranging, typically, from $3,000 to $5,000 apiece--to just over half of its admitted students, explains Scott Stensrud, vice president of enrollment management. "The B students were showing us 'I got all these merit awards from all these other schools,' " Stensrud says. Even though the competing colleges often charged much higher tuition and thus would have been more expensive, students were deciding against HPU because they felt so flattered by the other schools, he says. The new policy helps students because the average student pays less today to attend HPU than he or she would have a year or two ago, he says. The school can afford to cut its average price because the new scholarships have attracted many more students to the university, so the school is receiving more tuition, overall, Stensrud says.

4. To reduce "sticker shock" by giving students and parents an early idea of what their true out-of-pocket expenses will be. Albion College in Michigan, which advertised a total cost of attendance of more than $40,000 in 2010, often awards merit scholarships as soon as applicants are accepted. That can be months before the FAFSA deadlines, which are typically in February or March. Albion President Donna Randall says the school wants to alert students and parents as early as possible if they won't have to pay the full price. Albion awards merit grants to nearly 90 percent of its 1,700 undergraduates, about a third of those recipients are judged to have enough family income or other scholarships to pay for college.

5. To make up for some out-of-touch rules that consider many middle class families not "needy." Rhodes College in Memphis, for example, reports giving scholarships to about 35 percent of its admitted students who don't qualify as needy. Bob Johnson, vice president for student and information services, says his school realizes a student from a New York family earning, say, $150,000, might not technically qualify as "needy," but pays so much more in rent and transportation costs than families living in lower-cost cities such as Memphis that they need financial aid to pay Rhodes's total cost of attendance of about $46,000.

6. To meet expectations of rewards from the current generation of teenagers, many of whom grew up receiving trophies simply for showing up for soccer games or karate class. "This is a generation that expects to be recognized," says Stensrud. He says he often gets calls asking for merit scholarships from C-plus students. He tells them: "You were accepted on probation and you really thought you were going to get a scholarship?"

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