Thursday, Sep. 04, 2008

The New Battle over Financial Aid

In-state tuition. For decades, it was the one advantage big state schools had that even the Ivy League couldn't match, in terms of recruiting the best and the brightest to their campuses. But these days, that's no longer necessarily the case. Starting this September, some students will find a Harvard degree cheaper than one from many public universities. That is, of course, if they can get in.

Harvard officials sent shock waves through academia last December by detailing a new financial-aid policy that will charge families making up to $180,000 just 10% of their household income per year, substantially subsidizing the annual cost of more than $45,600 for all but its wealthiest students. The move was just the latest in what has amounted to a financial-aid bidding war in recent years among the U.S.'s élite universities as they try to ease concerns over staggering tuition bills.

Though Harvard's is the most generous to date, Princeton, Dartmouth, Yale and Stanford have all launched similar plans to cap tuition contributions for students from low- and middle-income families. Indeed, students on financial aid at nearly every Ivy stand a good chance of graduating debt-free, thanks to loan-elimination programs introduced over the past five years. And other exclusive schools have followed their lead. Williams and Amherst colleges in Massachusetts, North Carolina's Davidson College and Virginia's William & Mary all replaced loans with grants and work-study aid starting last year. And several more schools are joining the no-loan club this fall, including Maine's Bowdoin College and California's Claremont McKenna College. "Applications were up 11% last year," says Davidson president Tom Ross. "That tells us a lot more families now see Davidson as an affordable option."

Even more schools have taken steps to reduce debt among their neediest students. Among them: Caltech, which this year began replacing loans with grants for American students with household incomes below $60,000, and College of the Holy Cross, which offers free tuition to students from its surrounding community in Worcester, Mass., if their family makes less than $50,000. And many public and private universities now offer similar packages to state residents who are at or below the federal poverty level of $21,000 a year for a family of four. "Students' tuition, fees, food, books and a place to live are all covered in full," says Rick Shipman, financial aid director at Michigan State, which has offered a loan-replacement plan since 2005. "All they have to think about is learning when they're here."

But experts caution that families shouldn't expect to see most financial-aid packages rise to the level of Harvard's largesse anytime soon. Over the past few years, Congress has gotten fed up with wealthy schools hoarding their enormous endowments — Harvard's reached $35 billion last year — while still regularly raising tuition prices. The average tuition and fees at private four-year colleges rose 14% in the past five years, according to the nonprofit College Board; the increase was 31% at public schools. Fees themselves at many public universities are skyrocketing, even as tuition holds more or less steady. "It's fair to ask whether a college kid should have to wash dishes in the dining hall to pay his tuition when his college has $1 billion in the bank," U.S. Senators Max Baucus (a Democrat from Montana) and Chuck Grassley (a Republican from Iowa), the leaders of the Senate Finance Committee, wrote last January in a letter to the 136 American colleges with endowments of $500 million or more.

Although Harvard and other wealthy schools may appease legislators with more generous aid packages, the trickle-down effect might be minimal. Mark Kantrowitz, a financial-aid expert based in Pitsburgh, Pa., who runs the website, predicts that fewer than 5% of schools will do away with loans entirely. That's because the vast majority of schools don't have large endowments they can tap to supplement lower tuition revenue. Many still depend heavily on net tuition to pay for operating costs, including faculty salaries and facility maintenance. That may be especially true at public schools — which educate 75% of undergraduates in the U.S., compared with the Ivy League's 1% — as funds decrease substantially during the ongoing economic downturn.

"All schools want more low-income students, a higher percentage of students who get grants instead of loans," says Morton Schapiro, president of Williams College and an economist who studies financial aid. "But they simply can't afford it."

Indeed, pressure to keep up with the Ivies in this respect could end up being detrimental to less affluent schools. Michael McPherson, an economist and former president of Minnesota's Macalester College, warns that some may choose to increase class size or skip prestigious faculty hires in order to offer more generous aid packages. In the end, "they risk sacrificing quality to mimic the big boys," he says.

To avoid such an outcome, Davidson — whose $446 million endowment ranked 143rd in the U.S. last year — is tapping alumni and other private donors to pay for its loan-elimination program. The school has already raised $15 million of the $70 million needed to fund the initiative. And should Davidson have trouble getting alums to kick in enough cash, the school's trustees have pledged to dip into operating reserves rather than raise tuition costs. "This is the right thing to do to make sure every kid, no matter what their family's income, gets a first-rate education," Ross says.

To pay for its loan-elimination program, Bowdoin will earmark approximately $22 million, or about 16%, of its $140 million operating budget. Claremont McKenna, which has 1,200 students, has said only that the school plans to increase its financial-aid-grant budget by $1 million.

Of course, the colleges that don't offer such tuition breaks know they will likely lose students to those that do. But don't expect state schools to start rushing in. Even public universities that have large endowments have yet to embrace no-loan programs. Take the University of California system, whose $6.4 billion endowment was the 12th biggest in the nation last year. The UC schools already educate more poor kids than their Ivy League counterparts, both in terms of absolute numbers and as a proportion of their student bodies. Even at the system's flagship schools, UCLA and Berkeley, more than a third of students live in households making less than $40,000, compared with just 10% at Harvard or Yale. That means that replacing loans with grants at the California schools would cost significantly more. Add in political pressures to avoid increasing tuition and fees — a large percentage of which go to fund financial aid in California — and the idea of eliminating all loans is a nonstarter.

So for now at least, a student whose family earns $90,000 would have to pay as little as $4,500 to go to Harvard but would get little to no financial aid to help cover Berkeley's annual cost of $25,000. A no-loan program "is not a sustainable solution for us," says Berkeley chancellor Robert Birgeneau, who is heading a task force charged with examining how to keep college affordable for all families in the state. "We'd likely not be able to help the poorest students as well down the line." (To see the evolution of the college dorm room click here.)