The Revolution in College Financial Aid

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 second 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 she had originally thought of going, largely for financial reasons. Until then, the D'Amicos 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 League education. (The D'Amicos' family income is a little more than $90,000.) Now "it's almost like Harvard is rewarding you for doing hard work."

Harvard's announced reforms quickly resonated far beyond its walls. Within months, a score of other well-endowed schools publicized their own aid overhauls aimed at 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 out of self-interest—trying to nab every possible applicant and ward off 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. Yet one thing was clear: the financial-aid landscape has inexorably shifted.

Harvard's initiative had three major aspects. The first, dubbed the "zero 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 enacted 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. Harvard's leadership also fretted about what Fitzsimmons calls the "upstairs-downstairs syndrome"—that the student body was polarizing into rich and poor, with little in between.

Other rich universities quickly responded. Yale announced cost reductions for families earning as much as $200,000, and Stanford eliminated tuition for parents earning up to $100,000. 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. 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.

Some experts find much to praise in the financial-aid revolution. Plenty of families are getting sorely needed relief. The institutions are furthering the cause of socioeconomic diversity. And Robert Shireman, executive director of the nonprofit Project on Student Debt, says "the announcements have been very important in helping tell families that they should not rule out colleges based on a sticker price that looks really high." Moreover, Richard Kahlenberg, a senior fellow at the Century Foundation, says that by extending help to middle-class kids universities can defuse resentment toward poor families who enjoy 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. Harvard has placed them in an untenable position—unable to match its munificence, yet facing families who've heard the news and now want to haggle. John Burdick, dean of admissions and financial aid at the University of Rochester in New York, says his "concern is the larger signal to the marketplace about what education should cost." At most schools, Burdick says, tuition doesn't cover the full cost of educating a student; universities make up the gap by using endowments 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. Yet poorer institutions don't have that luxury.

Many speculate—and Fitzsimmons's own comments suggest—that by implementing its reforms, Harvard was trying to compete more aggressively with the flagship U.S. public schools. Indeed, for families in some income classes, Harvard is now the cheaper option.

Even schools that don't really compete with the Ivies 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, and 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?' "

Other 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. "It's people in the bottom half of income distribution who are facing huge amounts of unmet financial need," he says.

What's especially troubling is that the percentage of poor American students in higher education has declined in recent years.

Other critics point out that Harvard's intentions behind its 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 U.S. 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 in a bill just passed by Congress and awaiting the president's signature: a requirement that the government study how much endowment money colleges spend on financial aid, a directive to publish a 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, they've already made a good start.