A Financial Earthquake

Jennie D'Amico first heard the news in an ecstatic e-mail from her father in Brewer, Maine. It was December 2007—the middle of her sophomore year—and Harvard had just announced a range of new financial-aid policies aimed at easing the strain on middle- and upper-middle- income families like hers. The bottom line for D'Amico's parents: their expected contribution would plunge from a little more than $30,000 per year to about $13,000. It was, she says, "sort of, 'Wow, Harvard now costs less for me than the University of Maine'," where D'Amico had originally thought of going, largely for financial reasons. Until then, she and her family felt as if they were in a "financial-aid black hole," as she puts it—neither poor enough to qualify for free tuition nor rich enough to easily afford an Ivy Leagueeducation. (The D'Amicos' family income is a little over $90,000.) "It's almost like Harvard is rewarding you for doing hard work."

Harvard's major restructuring of financial aid resonated far beyond its walls. Within months, a score of other Ivies and well-endowed schools publicized their own aid overhauls aimed at the same target: middle- and upper-middle-income families overwhelmed by the spiraling cost of higher education. The reactions were swift, impassioned and all over the map. While some hailed Harvard's move as enlightened, others charged that the university was acting merely out of self-interest—throwing its cash around to nab every possible applicant and also to ward off congressional lawmakers who have been scrutinizing endowment spending at wealthy colleges. Still others worried about the broader consequences for the country's poor students, as well as for more modestly endowed schools. Wherever observers have come down on the issue, one effect is clear: the financial-aid landscape has inexorably shifted. "When Harvard does something like this, all higher education takes notice," says Tony Pals, spokesman for the National Association of Independent Colleges and Universities. "It has put the issue of college affordability that much more in the spotlight."

Harvard's initiative had three major aspects. The first, dubbed the "0 to 10 percent standard," decreed that families making between $120,000 and $180,000 annually would now be expected to pay no more than 10 percent of their income. For those earning less than $120,000, the percentage would steadily decline until reaching zero for incomes of $60,000 and below. That means a family making $120,000 would be expected to contribute about $12,000, compared with $19,000 before. The second component: all loans would be replaced by outright grants (a policy that Princeton was first to enact, in 2001). And finally, in most cases Harvard would no longer consider home equity in determining a family's ability to pay.

How does Harvard explain its new policies? Based on research and anecdotal evidence, "it was really clear that we were just not getting the very good middle-income students to even think about Harvard" because it was perceived as too expensive, says William Fitzsimmons, dean of admissions and financial aid. "They were almost automatically going straight to the great flagship public universities." Moreover, Harvard's leadership fretted about what Fitzsimmons calls the "upstairs downstairs syndrome"—that the student body was polarizing into rich and poor, with little in between. "We had a great fear we were becoming unaffordable and inaccessible," he says. "Now I think we can make a great case we are neither."

Other rich universities quickly responded. Yale announced cost reductions for families earning as much as $200,000 (which made it more affordable than Harvard for some income categories), and Stanford eliminated tuition for parents earning up to $100,000 (chart). A cavalcade of institutions declared they were fully or partially replacing loans with grants, including Ivies like Dartmouth and Columbia, as well as liberal-arts colleges like Swarthmore and Pomona. (Amherst unveiled a no-loan program in July 2007, before the Harvard news.) Poorer schools, unable to match such generosity, have tried to stay in the game by promoting other enticements, like tuition freezes and the elimination of loan interest. More announcements are likely, as the ripple effects of Harvard's decision continue to play out.

Some education experts find much to praise in the financial-aid revolution. Plenty of families are getting sorely needed financial relief. The institutions are furthering the cause of socioeconomic diversity. And even for those families who don't directly benefit (and to be clear, 99 percent aren't sending their kids to these elite schools), there's value in hearing a message of affordability, says Robert Shireman, executive director of the nonprofit Project on Student Debt. "The announcements have been very important in helping tell families that financial aid reaches pretty high up" and that "they should not rule out colleges based on a sticker price that looks really high." What's more, "the extension of financial aid to middle-class students is a good thing politically," says Richard Kahlenberg, a senior fellow at the Century Foundation. By including such kids, universities can defuse middle-class resentment of poor families who have often been the target of other financial-aid programs—and thereby protect those programs.

The reaction from leaders at less-wealthy institutions, however, hasn't been nearly as upbeat. Some of their grumbling surely stems from Ivy envy. But they make a substantive point: that Harvard has placed them in an untenable position—unable to match the Ivies' munificence, yet facing families who've heard the news and now want to haggle. "We got calls from students right away saying, 'Harvard did this. Are you going to match them?' " says John Burdick, dean of admissions and financial aid at the University of Rochester in New York. "My concern is the larger signal to the marketplace about what education should cost."