(MONEY Magazine) – The Nott's Memorial Building, dedicated in 1878 and named after Union College's former president Eliaphet Nott, looks like a gigantic 16-sided stone cylinder. This isn't as bad as it sounds once you go inside. Under a soaring dome lined with more than 700 pipes covered with colored glass, a group of students sitting in the middle of the building seem to twinkle in the darting bands of light.

Every prospective student who travels to the Schenectady, N.Y. campus for a tour of Union gets taken here, and it's easy to see why. It is a reminder of why so many people aspire to go to prestigious private universities. Inside, it is as cool and quiet as a cathedral.

But Nott's Memorial is no church. In fact, these days the building is more like the center of a lively marketplace. What's for sale is a college education.

At prestigious private schools around the country, the cost of going to college keeps rising, already topping $30,000 a year--a stretch even for those with high incomes. There is no shortage of good students who want to go to these places. But the really great students--the ones who help propel schools further up in the rankings of guidebooks and achievement-driven parents--are few, and competition for them has now reached unprecedented heights.

Simply put, many schools are willing to pay to get the students they want. Some have changed the way they calculate a family's need so that households earning as much as $150,000 are eligible for financial aid. Other colleges are giving merit scholarships to students with stellar credentials from even wealthier families. Financial aid, always a barometer of our changing mores, once went only to the needy and promising scholar. Now it is more akin to a bidding process.

Once this would have seemed out of place at Nott's Memorial. Like many well-regarded schools, Union had always resisted merit aid, on the grounds that giving money to those who don't need it to pay the school's $32,646 price tag would inevitably take money away from those who do. Then Union started losing top students to its competitors; now it has found itself propelled inside what Dan Lundquist, Union's dean of admissions and financial aid, describes as "the Moroccan bazaar, where you're eyeball to eyeball with the family," haggling over the price of a college education.

This past spring, the school made many changes in its financial aid policy, all designed to test an idea summed up best by John Maguire, chairman of Maguire Associates, the educational consulting firm advising Union: "Virtually everyone has his or her price." The college targeted 31 high-achieving applicants for the class of 2005 who had not applied for financial assistance and offered them all $20,000-a-year merit scholarships. Another 126 top students who had requested financial aid were promised at least $14,000 a year, regardless of their families' need. Plus the school implemented a formal process to handle appeals from families whose requests for financial aid had been denied or who wanted bigger packages. I was invited inside this process, to observe two financial aid appeals meetings and talk with college officials.

When you stand inside Nott's Memorial, it is possible to forget about all of this and remember the joy of hearing a lecture that sends you down a different path, or imagine yourself striding across the manicured lawns and feeling the world's possibilities stretch out before you. But not for long, it seems.

Michael S. Brown, the director of financial aid at Union, stands next to me as we take in the view inside Nott's Memorial in reverential silence. Then he leans over and whispers, "Isn't it beautiful in here? This is where they take them to make the final sale."

Getting out of the box

When Union hired Maguire Associates, the Bedford, Mass.-based consultants, the college's administrators knew they were in a box. And as Michael S. McPherson, president of Macalester College in St. Paul, memorably told a group of financial aid directors earlier this year, "The box sucks."

The Maguire firm runs sophisticated statistical analysis on admitted and enrolled students at colleges and universities in an effort to predict who will enroll, who won't and how much money it would take to change a no into a yes. One morning in Maguire's offices, nine of the firm's consultants gave me a steely-eyed assessment of Union's troubles. "Union is getting hit," said Warren Zola, flashing charts and graphs on the screen before me. "Their top students overlap with top schools, and those students will typically go to Harvard over Union. At the bottom, the students they get overlap with less selective schools that are heavily into merit aid."

The result, explained Maguire, a former physics professor and dean of admissions at Boston College, is that "you end up left with the broad middle, which for Union is too homogeneous: white, suburban, upper-middle-class kids." Later Zola was blunter. "One of Union's main questions," he said, "was, Can we buy students and how much would it cost?"

Union is what's called "need aware," meaning that in later rounds of admissions a candidate who can pay his or her own way has an edge over one who can't if the two are equally qualified. But once a student is admitted, the school will meet the family's full financial need. Union didn't want to abandon that commitment or reduce awards to applicants who were likely to choose Union anyway.

Given these constraints, Maguire's conclusions were disheartening. Closing the gap with elite private liberal arts colleges like Williams College or Amherst College was going to be "stunningly difficult," as dean Lundquist reported to the school's trustees. Heather Allen, a Maguire consultant who happens to have gone to Williams, told me, "I think Williams is not one step above Union, but two. At this level, kids aren't just swayed by price but by perceptions of prestige."

The Maguire team concluded that, even if Union gave away tuition to its top admitted students to boost SAT scores--the average combined SAT score of Union's class of 2004 was a respectable 1,220--the average would probably rise only slightly. For Union officials, said Zola, "It came down to asking themselves, Is five points more on the average SAT score of your students worth a million dollars?"

So instead of focusing on boosting SATs, Union decided to throw money at 31 students who showed potential to win a prestigious award or accomplish something noteworthy that might attract publicity to the campus. If even one of the 31 came through, the thinking went, "it can change the whole face of the campus," explained Maguire consultant Allen.

"What's a necessity?"

Union's move to merit aid is just one part of a changing financial aid landscape. Tax credits for college savings plans, state programs offering money to students who maintain certain grades and other innovations have all been implemented with an eye to easing the burden of college costs on middle-class and upper-middle-class families. Some educators argue that the trend toward offering aid to those who want it, not just those who need it, has gone too far. In July, the presidents of 28 private colleges agreed on a set of principles to determine a family's need for financial aid and called for other schools to sign on as well.

But any discussion about need inevitably ends up being as much about values as finances. "You have a family that makes $60,000 a year and they would not aspire to something like their son or daughter having a summer in Europe during high school. You have a family that makes $150,000 and they do aspire to that," Macalester's president McPherson told me. "When assessing need for aid, do you take into account that a family with $150,000 a year expects to take a vacation in the summer, drive a Lexus, not a Taurus, and send a child to Europe? What's a necessity and what's a luxury? You can't help but judge people when you try to decide that."

Such issues were much in evidence during the appeals meetings I observed at Union. The financial aid staff considered not only the families' assets and tax returns but also their motivations. "Are they asking for more money because they're shopping us to leverage a better deal at another school?" was a refrain I heard more than once as Lundquist, Brown and three associates went through file after file.

Some of the appeals I heard were from people who had suffered a misfortune--unemployment, illness, divorce--and asked the school to take the changed circumstances into account. But many came from people who were affluent but felt entitled to the money, like the family who earned $91,000 a year and had $540,000 in assets but asked for a discount because their portfolio had dropped by $60,000 in the recent market downturn. Some admitted they didn't qualify for aid but said other schools had offered it to them and Union should too. Others had high-paying jobs but were worried about losing them in the weakening economy.

In the financial aid bazaar, I learned, good grades are a kind of barter, something to be rewarded not only with admission to a top college but also with cold, hard cash.

"Ask, ask, ask"

"It's a buyer's market out there," Brown said wearily one afternoon after listening to some of these cases, his hand running along the spines of the folders that were stacked up like an accordion before him. "When it comes to money, the attitude seems to be just ask, ask, ask."

One of the people who asked was James Russo. His son Zachary, who had an outstanding academic record, board scores of 1,350 and extracurricular activities in varsity sports and music, was admitted to Union, Alfred University and the State University of New York at Binghamton, among other schools. He had applied for need-based aid from Union and received it, but the family wanted a merit award as well. "It's like buying a car," James Russo said to me. "You won't get the best price until they're convinced you want to buy."

The Russos had sent the same financial information to every school where Zachary applied--and each of them had assessed the family's need differently. With the aid packages Zachary was offered, the cost to his family would have been $17,000 at Union; $20,000 at the Rochester Institute of Technology; and $12,000 at Binghamton. The State University of New York at Albany offered Zachary free tuition. No wonder Russo thought it was like buying a car.

"I asked [Russo] how much he thought he needed," financial aid officer Laura Augustine said at the meeting. "He said if we offered them $20,000 [in aid], they'd come to Union; anything below $18,000 probably not. I know how it sounds, but the dad is actually nice."

The other three staffers thought they should hold at their current offer. "He'll probably enroll anyway," Brown commented.

"I don't know," Augustine responded. "He's conscious of money." "What if we increase his award by $3,000 and give him $17,000?" suggested Beth Post, another financial aid officer. "It's close to the $18,000 he wanted." The others agreed.

In the end, though, Zachary chose Binghamton, swayed by the school's larger size, wider selection of courses and lower price. "We're not going to use the money we save to buy a car or something," James Russo said. "Zach wants to go to grad school."

The Russos were surprised by how widely the definition of need varied among schools. But even at a single school like Union, equally impressive kids from families in similar circumstances could end up with different awards. In one case I observed, two students who had been admitted to Union's prestigious premed program--which guarantees automatic acceptance at its Albany Medical College upon successful completion of Union--both appealed. Neither qualified for need-based aid, and Union had decided not to give either one merit money, on the grounds that acceptance to medical school was enough of an attraction. On appeal, Union held firm with one student but gave the other $3,000. The reason? The second student had received merit money from other competitive premed programs. (Both students ended up accepting Union.)

Aid director Brown objected to the decision. "We're counting on this [premed] program to have cachet. We don't need to give merit money," he argued.

The rest of the team was not persuaded. Said Lundquist: "It's harder to ride on cachet alone when she's getting $5,000 and $10,000 scholarships at our competitors."

The staff jokingly called Brown "the Terminator" because he was often tough on appeals. He says he's simply looking out for the school's bottom line. Union, with a healthy $4.9 million aid budget, hasn't had to dip into money earmarked for needy students to finance the merit awards. Still, its $275 million endowment is nowhere near the size of Princeton's ($8.5 billion) or Harvard's ($19 billion), and Brown worries about running short of money for those who really need it.

Education and its discontents

The trouble is, everyone thinks he or she needs help. When I spoke with parents who had gone through Union's aid process, they expressed bitterness about their aid packages from various schools. They felt they were the only people in America being asked to pay full price. They had all heard about other students who were no smarter than their own children--their neighbors' kids, their children's schoolmates, the daughter of the man who fixed their car--who got financial aid. They were convinced that the other parents were hiding assets. This discontent--this feeling that they were being cheated--was exacerbated by the slowing economy. They were anxious about borrowing at a time when their jobs seemed less stable and their retirement savings less secure.

Patricia Gregoire's daughter Heather had gotten a $14,000 merit offer from Union, $7,500 from Northeastern and nothing from Boston College, which was her first choice. BC, Gregoire says, had taken into account her family's significant home equity in refusing aid. "I can borrow against my home, but I don't want to," she told me. "What if my husband loses his job? I have a younger child, and there's graduate school to pay for." Heather decided that Union was too small; she is still weighing her other options, but she knows that parental loans to pay the full tab at BC is not one of them. "To take away my daughter's dream like that, I feel like crying," said Gregoire, her voice breaking.

Richard Janow wrote to Union after his son Dan was admitted, saying that he knew they didn't qualify for need-based aid by what he called "a wide margin." His salary and his wife's total in the low six figures. "Despite that," he added, "we are most comfortable with total expenses (to us) in the range of $15,000 per year or thereabouts."

That number was too low for the Union team. "Janow may feel like he's middle income," Post said at the appeals meeting, "but he's not. They can afford to pay, it's just a matter of priorities."

Janow, however, didn't see things that way. He worried about losing his job at the age of 57 in the rounds of downsizing at his company and about the battering his stock portfolio had taken--and since he was close to retirement, he would have little time to rebuild his nest egg. Taking into account college and graduate school for his two children, he calculates that the total family education bill without aid at private institutions would come to about $460,000, far beyond the means of even well-off parents like the Janows.

"My definition of middle class is someone who has to think about what he's buying," he told me. By that definition, he's definitely middle class. So when Franklin & Marshall offered Dan a $7,500-a-year merit award, his dad asked him to think about whether the two schools were that different, quality-wise. "Do you really want to turn down $7,500 a year to go to Union?" he asked. Dan is going to Franklin & Marshall.

"We overpaid"

For the most part, the Union aid team was sympathetic even to the financial plight of people who earned substantially more money than they did themselves. At one appeals meeting, I teased them that they called every applicant "a good kid." And it clearly paid to negotiate. Over the 47 aid decisions that were appealed (out of 792 awards), 40 were increased--by an average of $4,100.

Still, there was a sense at Union that some of the parents asked for money out of a sense of entitlement--that they were willing to take out huge loans to pay for fancy cars or second homes but not for a private college. "There are still families that are willing to sacrifice for their children's education," Dianne Crozier of Union's admissions office says. "But their numbers are dwindling." When some of the wealthier parents asked Brown how they could afford to pay for tuition, he says he sometimes let his feelings show: "The phrase 'Eat macaroni and cheese' has from time to time crossed my lips."

Others at Union are also uncomfortable with the way things are going. "I've seen us haggling over a few thousand dollars in the academic budget, over things we desperately need," says Stephen Leavitt, an anthropology professor. "Then to turn around and throw this money at people who don't need it, it's a little disturbing." And although Roger Hull, Union's president, backed the merit awards program after becoming convinced that the school was losing too many good students, he has his doubts. "In the end, we'll all be in the same situation we started from," he says. "We'll pay huge sums of money to get the same students we would in any case but with less net revenue to spend on everyone after they get here."

Still, seven of the 31 students who got $20,000 scholarships accepted, a jump in yield from 5.6% to 22.5% in this category of no-need, high-achieving students. Two even turned down Williams to enroll at Union. Of the 126 needy students awarded the $14,000 packages, 22 are enrolling.

Clearly, the money was a factor. "It made all the difference in the world," says Brenda Gallagher of Hanover, N.H., whose son John received one of the $20,000 scholarships. John, a varsity athlete in baseball and basketball with top SAT scores, had other excellent options: Johns Hopkins and Tufts University gave him no aid, but the University of Delaware and the University of Rochester offered him merit awards of $4,000 and $10,000, respectively. Union's package, Gallagher said, "pushed Union from fourth choice to one of his top ones. We felt that he would have gotten an equally good education at any of these schools. At Union, it cost $80,000 less."

The Gallaghers hadn't expected to get financial aid. They make good salaries and have been saving for their son's college education for years. Even so, Brenda Gallagher says, with the cost of private education now so high, "we could have only afforded to pay for a year and a half of John's education." They had been planning to take out a home-equity loan to cover the rest when the letter about the merit scholarship from Union arrived.

At Union, the main question now is how much they really had to pay to get the students they wanted. It's still too early for final assessments, but Lundquist says his first impression is that "we overpaid" for the $20,000 awardees. The seven who are coming to Union are all outstanding students and Union is glad to get them, Lundquist says, "but I think we could have offered half tuition and been as successful."

The students who turned down the $20,000 scholarships had just slightly higher board scores, slightly better grade point averages and more Ivy League options than the seven who chose to enroll at Union. "The ones who are coming to Union had very, very nice choices, but we're not seeing Brown or Dartmouth in there," reports Kristine Gernert-Dott, an associate dean of admissions. "We're not ripping them away from the Ivies."

Already there is talk about what sorts of perks Union would have to offer on top of money in order to stay competitive--a guaranteed summer research opportunity, paid travel to meetings related to the student's professional field, even a monetary gift at graduation. In fact, Union has already started down that path. All of the 31 students offered $20,000 merit awards also received a letter from the head of postgraduate opportunities saying that he would work with them to ensure that they would be competitive candidates for awards like the Rhodes and Fulbright scholarships. "Whatever we do, we have to somehow find a way to translate it into a dollar amount for the parents," says Leavitt, the anthropology professor. "Let's face it: Money talks."

One afternoon as I sat with aid director Brown in his office, he told me that the most common question he gets from parents as they add up their final bill is, "Is it worth it? Worth is such a loaded word," he added. "How do you place a dollar figure on something you can't put your hands on?" Alan Fischman, whose son Adam turned down the $20,000 Union scholarship for Cornell, asked me the same question--"How do you put a value amount on prestige?"--although that is exactly what the Fischmans had done.

And everyone now seems to be doing it. Even people at Union who worry about what the college is doing don't argue that the merit-aid drive should stop. They all realize that there is no turning back. Among the families that Union and other elite schools most want to attract, college is now seen less as a rite of passage with the potential to completely transform a young person's life than as a commodity to be bought and sold, like a television set or a vacuum cleaner.

The appeal that best illustrates the aid bazaar came from a family that had not applied for aid but was seeking merit money from Union after getting awards from other schools. A consultant hired by the family to help them shop for the best offer had attached a brief note to the parents' plea: "More money will help close this deal."

Lundquist looked up at us as he read those words. "Doesn't it always," he said. And with that, the negotiations began.