College Guide: Financial Aid for the Middle Class

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 League education. (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."

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.