Boosting College Financial Aid

Harvard’s new undergraduate financial-aid policies, affecting even students from high-income families, were announced on December 10—and received national attention, setting off debate on financial aid generally, private institutions’ use of their endowments, and the relative position of other colleges (see “Raising the Ante,” page 56). The principal features of the new system are meant to be easy for families to use as they plan for their children’s education:

  • An income-based standard. Families with incomes from $120,000 to $180,000 are asked to pay 10 percent of their income toward a child’s cost of attending Harvard: from $12,000 per year (compared to the current cost of $19,000) to $18,000 per year (versus the current $30,000.) For families with incomes below $120,000, the contribution will decline from 10 percent to zero (already the standard for families at an income level of $60,000 or less). This reduction, totaling one-third to one-half of the current cost to those families now required to contribute, would, Harvard estimates, make the price of a College education for students on financial aid comparable to the cost of an in-state education at leading public universities.
  • No loans. In calculating aid packages, Harvard will no longer expect students to take out loans; it will provide increased grants instead. For students from the lowest income cohorts, that means an additional $1,000 per year of scholarship aid.
  • Eliminate home equity. Harvard will no longer consider home equity in calculating a family’s ability to pay; in practice, this will reduce the expected contribution toward the cost of attending Harvard by $4,000 per year.

President Drew Faust, Faculty of Arts and Sciences (FAS) dean Michael D. Smith, and dean of admissions and financial aid William R. Fitzsimmons unveiled the new program, noting that the initiative will take effect for all College students, beginning this fall.

“We want all students who might dream of a Harvard education to know that it is a realistic and affordable option,” Faust said. “[W]e are determined to do our part to restore [education’s] place as an engine of opportunity, rather than a source of financial stress.…[W]e are not tinkering at the margins, we are rebuilding the engine. This is a huge investment for Harvard.”

The enhanced aid packages will initially cost about $22 million annually, the University estimated, increasing the grant-aid budget from $98 million this year to nearly $120 million in the 2008-2009 academic year (about 22 percent). During a conference call, Faust said the money would come from presidential and FAS discretionary funds and distributions from the endowment (which totaled $34.9 billion for the University as a whole as of June 30, 2007; FAS accounts total about 45 percent of that sum).

According to Fitzsimmons, 53 percent of undergraduates now receive grant aid; that cohort typically comes from families with incomes of $180,000 (between the 90th and 95th percentiles for family incomes nationwide) or less. (About 225 students whose families’ incomes exceed $180,000 also receive grant aid, reflecting circumstances such as health crises or multiple children in college at once.) The remaining students do not qualify for financial aid—meaning that roughly half of current undergraduates come from the top 5 to 10 percent of families, measured by income. In theory, the proportion of undergraduates on financial aid could rise if the new program encourages additional talented middle- income applicants to seek admission.

In the era of the $45,000 bill for a year of college, Fitzsimmons said, “Many parents won’t even allow their sons and daughters to apply to private colleges, while others allow their children to attend but experience real pain in paying the share we ask of them.” He also cited survey research showing that students from the highest-income groups enjoy “differential access” to the undergraduate experience. Aid recipients are constrained in their ability or willingness to explore unpaid research opportunities or internships, to spend time with friends (as opposed to working or helping their families secure loan funds), to study abroad during the summer, and so on. Fitzsimmons called this finding a “kind of Upstairs, Downstairs situation,” resulting in a “diminished experience” for half the student body.

There is strong evidence that such effects linger. In “Constrained after College: Student Loans and Early Career Occupational Choices,” Jesse Rothstein and Cecilia Elena Rouse of Princeton’s Firestone Library found that “[D]ebt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid ‘public interest’ jobs.” Their paper, published by the National Bureau of Economic Research last May and based on the decision early this decade by “Anonymous University” to eliminate loans from its financial aid, also found “some evidence that debt affects students’ academic decisions during college.” In an essay on “Expanding Equal Opportunity” in the Winter 2007 Harvard Educational Review, Shirley M. Tilghman, president of Princeton (which fits all traits attributed to “Anon U”), says its proportion of students on financial aid rose by 17 percentage points in a recent class, and representation of low-income and minority students has increased strongly, since it did away with loans in 2001. She also cites accumulating evidence that students are “taking up positions in nonprofit, governmental, or educational fields.”

Hence many of the elements of Harvard’s new aid policy.

The changes not only build on prior efforts to bring private education within reach of lower-income families, but also reflect heated competition among private institutions to liberalize their aid offers.

Harvard’s financial-aid initiative started in 2004, when President Lawrence H. Summers announced that families with incomes below $40,000 would no longer need to make any contribution to the costs of educating their children at the College, and such contributions were reduced for families with incomes between $40,000 and $60,000 (see “Class-conscious Financial Aid,” May-June 2004, page 62). Yale, Stanford, Penn, and other private institutions began comparable programs, and public schools such as the University of North Carolina promoted their augmented aid programs. Harvard’s threshold rose to $60,00o in 2006, with reduced contributions expected for families with incomes from $60,000 to $80,000 (see “Aid Augmented,” May-June 2006, page 69).

During 2007, Amherst, Davidson, and Williams announced plans to eliminate loans, emulating Princeton. (Princeton also excluded home equity from aid calculations, as did Stanford, which had earlier reduced the weight of that asset in its aid awards.) On December 7, just ahead of Harvard, Duke—nearing the conclusion of a $300-million financial-aid campaign—eliminated parental contributions for families with incomes below $60,000; moved to help students with family incomes below $40,000 graduate debt-free; reduced loans for students from families with incomes up to $100,000; and capped loans for families with higher incomes at $5,000 per year. Duke estimated the cost of the initiatives at $12.7 million in the first year, a 17 percent increase over current spending on need-based, merit, and athletic scholarships.

These measures, like Harvard’s, reflect several factors. First, the earnings of middle- and even some upper-income families have not kept pace with the costs of private higher education, which typically rise faster than the rate of consumer-price inflation in general. Second, Harvard and other need-blind selective colleges have had some success in expanding applications from lower-income students, and now see the opportunity, using recent endowment gains, to extend aid to most of the population. Third is heightened competition among schools for top students. (By making its aid policy public on December 10, Harvard, which no longer offers early admissions, sent a signal to students awaiting early-action decisions from other institutions, typically mailed in the middle of that month; presumably those accepted would then begin studying financial options.) And fourth, members of Congress, led by Senator Charles Grassley (R-Iowa), have raised questions about endowed universities’ and colleges’ use of their assets—particularly after several years of strong investment returns—and about continuing increases in tuition, room, and board fees. He has advocated that such institutions, like tax-exempt grant-making foundations, spend 5 percent of their endowments annually—well above the disbursements made by Harvard and most of its peers.

FAS dean Michael Smith emphasized that the aid enhancements are not meant to address only “one segment” of the faculty’s students, citing recent increases in graduate-student stipends and fellowships (see “Gains for Graduate Students,” page 58). President Faust promised more action in the “near future,” reflecting the increasing importance of graduate and professional education and the resulting “enormous debt” many students assume.

“What we’re trying to do,” Faust said, “is reconfigure…what affordable access means,” from the time students decide where to apply to college to their years as undergraduates. The size and reach of the new aid program, she stressed, demonstrate that “We’re reframing the whole approach.”

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