In response to a question on financial aid, Morty told a story about an alum who is a college professor. Her son had been accepted by Williams and by an Ivy. [Morty did not so say directly, but the school was almost certainly Harvard, Yale or Princeton.] The alum told Morty that the Ivy was charging her family $20,000 per year less than Williams proposed. She just thought he ought to know. [EphBlog readers already know this and also know that Morty does not like bargaining.]

Morty used this anecdote to highlight some of the, in his view, absurdities in current financial aid packages at elite colleges. Morty had no problem with many of the recent changes. He thought that it was fine to allow the families of “poor” students (meaning families from the bottom half of the income distribution) to pay nothing for their child’s education. He seemed comfortable with eliminating student loans. But he felt strongly that HYPS were going to far, that offering financial aid to a family making $180,000 (and who had been making similar amounts for years) was ridiculous and that it was absurd to describe such aid as “need-based.” Morty also worried that, if Williams were to match the generosity of HYPS, it would set off a chain-reaction among other schools. Amherst, Swarthmore, Brown, Dartmouth would have no choice but to match us. Morty felt strongly that this would be a bad outcome, that these rich families ought to pay for the college education of their children. He implied that the current equilibrium, with HYPS being much more generous than other schools, was somewhat stable.

Morty also pointed out that much of the news coverages of these aid policies missed some of the juicy details. [I am embarrassed to admit that I missed these details as well.] For example, the family contribution for income levels from $120,000 to $180,000 is around 10% at Harvard. If your family makes $180,000, Harvard will only charge you $18,000. Morty pointed out that this was true but highly misleading. What happens if your family makes $181,000? Does Harvard charge you the full $48,000? Wouldn’t that make for a pretty horrendous marginal tax rate? Make an extra $1,000 and, not only does Harvard take all of that money, but it takes an additional $29,000 (post-tax!). Imagine the fellow offered a bonus at the end of the year and telling his boss, “No! Don’t give me the extra money!”

Morty explained that, of course, this is not the way things work. [I have never seen anyone point this out before.] Instead, the family who makes $181,000 still gets a huge break from Harvard, as does the family making $182,000, the family making $183,000 and so on. They may have to pay more than 10% of their family income to Harvard, but not much more. Morty said [not sure if he was estimating or claiming this as fact] that financial aid at places like Harvard actually goes to families making up to $280,000 because there is a smooth slope as you move above $180,000. In other words, the only families that pay the sticker price at Harvard are those with family incomes above $300,000 or so.

Below are highlights from an article which outlines Harvard’s new policy and my comments.

The main points of Harvard’s new policy are:

* 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.

1) Can we do a back of the envelope calculation to estimate how high family income can go before Harvard stops offering “need-based aid?” If the percentage of income demanded goes from 0 to 10% as family income rises from $60,000 to $120,000, then the rate of change (assuming linearity) would be 1.67% per $10,000. So, a family making $90,000 would be expected to pay 5% (or $4,500) toward tuition. Assume that this 1.67% per $10,000 continued once you went above $180,000. A family making $200,000 would be expected to pay 13.3% (10% base rate + 2 times 1.67%) or $26,680. Doesn’t that seem like way too high a marginal tax rate? The family’s income has gone up by $20,000 and its bill from Harvard has increased by $8,680. And don’t forget that the family pays with post-tax income. So, that $20,000 increase pre-tax is only around $13,000 (more or less) post-tax, so the marginal Harvard tax is more than 50%. Of course, it would be tough for any family to adjust its behavior to meaningfully game this system, so perhaps Harvard can get away with charging high marginal rates. And these families are so excited to be getting any financial aid that there are probably few complaints.

Anyway, if the increase were actually at a 1.67% per $10,000 above $180,000, then Harvard would stop aiding families at an income of around $240,000. For Morty’s estimate of $280,000 (and he did mention that number specifically) to be correct, the marginal increase in percentage charges would be around 0.7% per $10,000, or about half my estimate for the marginal increase going from $60,000 to $120,000. Such a rate would make the marginal tax rate problem described above much less severe.

2) Williams went loan-free last year. Related commentary here and here.

3) Williams still counts home equity, but not as much as it used to.

The central dilemma is the same as always. There are hundreds of students who are accepted by Williams and by Harvard/Yale/Princeton/Stanford. We all want more of these students to choose Williams. We don’t want all of them to do so, of course. Many would be miserable at Williams. But many would be better off if they became Ephs. Yet, money does matter. I have no problem telling an applicant that she is better off at Williams than at Harvard, all else equal. But what if Williams is demanding $80,000 more in tuition from her family over the next four years? Is Williams that much better than Harvard? Perhaps.

And that is the central problem with Morty’s (and the Trustee’s) refusal to match the prices of competing schools. They are pricing themselves out of the market for the most outstanding students.

The article also notes:

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.

Nice spin! Although, in theory, more “middle class” (meaning family income less than $180,000) kids might apply to Harvard, there are just not that many US citizens with Harvard-level credentials who don’t already apply to Harvard. A little publicity won’t hurt, but the major effect here, in terms of increasing the percentage of students in financial aid, is that Harvard is just redefining “need” upward. Families with $200,000 incomes don’t get aid now (typically). Next year, they will. Presto! Harvard is more socio-economically diverse. The reductio ad absurdum would involve handing $100 to every Harvard student on the first day of classes. Everyone at Harvard would then be getting financial aid!

He [Fitzsimmons] 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.

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.

True! Isn’t competition a wonderful thing?

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.

Always good to see a Williams mention. Of course, Harvard being Harvard, there is a tendency to pretend that everything starts in Cambridge. In fact, the real start to this battle seems to be when Princeton went to no-loans in 2001. As Morty tells the story, the portion of Princeton’s endowment that is dedicated to financial aid had grown so large that Princeton had no choice but to go loan-free.

Classic EphBlog posts on how competition lowers prices are here, here, here and here. Fun stuff!

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Related posts:

  1. Lavish Financial Aid Packages
  2. Boston Globe Article on Financial Aid for the Middle Class
  3. Merit Aid at Harvard
  4. Taylor VI: Financial Aid
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