Tuition: The Price-Break Problem

Harvard University was the first to come to the aid of the middle class. Last December the university announced sweeping changes to its financial aid policy, eliminating loans and asking students from families with salaries between $120,000 and $180,000 to pay no more than 10 percent of their family's income to attend. Then came Duke, which vowed to reduce loans for students with family incomes up to $100,000 and establish a loan cap for wealthier ones. By the end of February a small group of elite private colleges—including Yale, Pomona, Swarthmore and, most recently, Stanford—announced their own generous financial aid packages for the middle-income families.

Which seems like a very good idea. The most selective schools have been steadily raising their tuition. Until now they've been ignoring the rising volume of complaints from middle-class parents of high-achieving kids who say that tuition, room and board at an elite private college, which now costs more than $40,000 a year in many places, is too high.

They've also been ignoring many enrollment specialists who have long warned that elite schools may soon have a two-tier student body: full-paying students from the top echelons of wealth and lower-income kids supported by generous financial aid packages.

What the schools couldn't ignore was pressure from Congress, where members have questioned why colleges enjoy tax-exempt status at a time when their endowments and their tuitions are rising. Last week 136 of the nation's richest colleges were asked to answer detailed questions posed by the Senate Finance Committee on their endowments and financial aid policies. The fact-finding letters were sent by Iowa Republican Sen. Chuck Grassley, who also held hearings last fall on the growth of college endowments. How did he get the schools' attention? Grassley began discussing legislation that would require colleges and universities, like other private foundations, to pay out 5 percent of their assets each year toward charitable purposes, or lose their tax-exempt status. Jill Kozeny, an aide to Grassley, said in an e-mail that the senator would be using information provided by the colleges and universities "to evaluate their endowments' activities in the context of tax-exempt laws and the accompanying obligations to taxpayers and donors."

Some applaud the middle-class college bailout. "For years top schools have been locked in an arms race, building lavish facilities for their students," says Richard Vedder, director of the Center for College Affordability and Productivity. "It's nice to see they are finally competing on price."

But economists say the effects may be far-reaching and not all together rosy. For starters, it will put pressure on flagship public schools, which traditionally educate some of the brightest, although not necessarily the richest, kids. Formerly, a high-achieving middle-class kid from Lansing, Mich., might get accepted at both Harvard and the University of Michigan but opt to stay in-state and graduate debt-free. Now it may be cheaper for that student to attend Harvard. University of Michigan spokeswoman Kelly Cunningham says the school is monitoring the developments. "We'll probably know the effects over the next few years, as prospective students identify and respond to these opportunities," she told NEWSWEEK in an e-mail. John Blackburn, dean of admissions at the University of Virginia, says the new policies at the Ivies will hurt, but not too much. Yes, other colleges will lose more top students to the most selective schools that are providing a great deal of financial aid to the middle class, he noted. But the Ivies have long skimmed the cream off his candidate pool. "What you have to remember is that [even with the new financial aid policies] the number of kids that we're talking about is very small," says Blackburn.

At second-and third-tier private universities, though, the impact could be much more severe. "We do provide what we think are very generous financial aid packages for the middle class," says Colgate University's David Hale, vice president for finance and administration. But Colgate, with an endowment of $700 million, has less prestige and can't provide the kind of handouts that Harvard, with its $34 billion endowment, can. Colgate isn't changing its financial aid policy, says Hale, "but we do have to be aware of what's going on. Schools compete hard for those students."

Economist Ronald Ehrenberg, director of the Cornell Higher Education Research Institute, thinks he knows how the new policies will play out for schools like Colgate, and he's worried. "Each institution wants to maintain their place in the pecking order," says Ehrenberg. Top colleges have signaled their intention to use their considerable endowments to bid against each other "for the same small group of talented middle-class students." Second- and third-tier schools, which aren't sitting on the same kind of endowment war chest, "will have to sweeten the packages in order to lure top middle-class kids by taking money away from students who really need it: low-income students."

Of course, most low-income students are educated at public colleges and universities. But at a time when the United States is failing to keep pace with an increasingly educated global workforce, the notion of narrowing any portal of access to higher education for poor kids seems like a bad idea indeed.