A Financial Earthquake

At most schools, Burdick says, tuition doesn't cover the full cost of educating a student; universities make up the gap by using endowments (for things like capital improvements) and, at public schools, state funds. By boosting aid spending, Harvard created a bigger gap for itself, but one it could easily fill by tapping its massive endowment (chart). Poorer institutions don't have that luxury. If they try to match the Ivies, says Burdick, "then what suffers is the product."

Many speculate—and Fitz-simmons's own comments suggest—that by implementing these reforms, Harvard was trying to compete more aggressively with the flagship public schools. Indeed, for families in some income classes, Harvard is now the cheaper option. Parents in the $120,000 bracket, for instance, will now pay about $7,000 less for a child studying at Harvard than at the University of California system, according to figures compiled by the Project on Student Debt. Harvard's move "obviously raises the bar for public universities," says UC Berkeley chancellor Robert Birgeneau. "Our challenge, then, is to raise significantly larger amounts of money for need-based aid." He's been lobbying California lawmakers to back public-private partnerships that would match donor money with state funds.

Even schools that don't really compete with the Ivies for students have felt the pressure. Robert Massa, vice president for enrollment at Dickinson in central Pennsylvania, at first regarded Harvard's announcement as a distant phenomenon. Then he watched with growing alarm as Swarthmore eliminated loans, then Bowdoin, then Colby—a college that competes directly with Dickinson. Harvard's decision was "now at our doorstep," he says. Dickinson decided to hold firm and retain loans as part of its aid packages. "Why should we not expect [students] to borrow a reasonable amount toward their expenses?" says Massa—just as people borrow for other big purchases like cars and homes. Harvard, he argues, has created the unrealistic expectation that students should graduate debt-free. "The megawealthy institutions should have stepped back and said, 'We can afford to do this, but what's the right thing to do?' "

Some policy analysts question whether it's appropriate to focus so much effort on families earning as much as $200,000. "When you start talking about families above $100,000, they're not middle-income," says Tom Mortenson, senior scholar at the Pell Institute for the Study of Opportunity in Higher Education. He notes that according to Census data, the middle two quartiles of family income range from $36,000 to $98,000. "It's people in the bottom half of income distribution who are facing huge amounts of unmet financial need," he says. Mortenson and others worry that as the competition for upper-middle-income students heats up, less-wealthy schools will seek to woo them with merit (non-need-based) aid at the expense of need-based aid. At the vast majority of colleges, "the financial-aid budget is a zero-sum game," says Don Heller, director of the Center for the Study of Higher Education. "If you're going to start moving money up the income ladder, it will come from poorer students."

What makes that even more troubling is that the percentage of poor students in higher education has declined in recent years. According to research by Mortenson, the share of Pell Grant recipients—who, by definition, are low-income—at the nation's top universities decreased from 8.8 percent in 2000 to 6.9 percent in 2006. Part of the problem, says Kahlenberg of the Century Foundation, is that poor students—unlike athletes, alumni kids and minorities—usually lack an advocate at the admissions table. That's not the case at Harvard, though. In 2004 its then president, Lawrence Summers, set a new tone with a widely hailed speech to the American Council on Education in which he argued for promoting greater access (the speech helped pave the way for the university's new aid policy). Mortenson's study singles out Harvard for praise, noting that it doubled its number of Pell Grant recipients between 2000 and 2007. (To put that in perspective, however, consider that UC Berkeley has more Pell Grant recipients than all the Ivies combined.)

Though that's a laudable track record, some argue that Harvard's intentions with its latest financial-aid reforms weren't purely noble. In recent years, the Senate Finance Committee has stepped up its scrutiny of endowment spending at the nation's richest universities and the proportion devoted to student aid. There are now 76 universities with $1 billion-plus endowments, and Harvard tops the list at $34.6 billion (figures as of 2007). Displeased that some colleges appear to be sitting on such vast hoards of wealth while continuing to raise tuition, the committee has been dangling the possibility of passing legislation requiring the richest institutions to spend at least 5 percent of their endowments annually, as foundations are required to do (the average in 2007 was 4.6 percent). Against that political backdrop, says Lynne Munson of the nonprofit Center for College Affordability and Productivity, Harvard's new policies seem "largely a PR stunt meant to allay public concern."

More legislative action may be on the way. Among the measures Congress is considering: a requirement that colleges report annually how they're using their endowments to contain costs, a directive to publish the list of institutions with the largest percentage increases in tuition, and the establishment of a Web site with details on college pricing. All that should ratchet up the pressure on universities to become more affordable and transparent. The wealthy schools "are in a position to do so much more than they're doing," says Munson. Perhaps, but for families like the D'Amicos, it's surely a good start.

© 2008