Financial Aid Strategies (Harvard now, and more to come)

Harvard and now Yale College have made news this week with new and generous financial aid policies. The Harvard policy was preceded by a promise made some three years ago  (the “Financial Aid Initiative”) that students with parental income of less than $60,000 a year would receive full scholarships. The new policy tells those who make as much as $100,000 more than that, that they will expected to pay (or borrow and pay) only 10% of income. It was already the case that 20% of aid went to families with income over $100,000, and now this figure will rise. The financial aid budget is expected to grow by more than $20 million a year – and then presumably by much more than that in subsequent years. Yale will detail a similar plan, and we can expect a very few elite schools to follow suit.

There are several ways to think of these strategies: (1) competitive (2) public relations (3) How else should Harvard spend money?) (4) a restructuring of the intergenerational bargain. I think (4) is the most important piece of the answer, but first some comments on the others.

Very few accepted students turn down Harvard. It would not seem that it needs to offer more financial aid in order to attract students from families who can afford to pay if willing to save or borrow or both. A family with $150,000 in income can probably borrow $100,000 for each of two children and pay the money back over ten years or more. The graduates themselves will likely be in a position to help with repayment. But Harvard might have known or feared that other schools would chip into its market position by moving first in this direction, and so it chose to unveil a very generous plan that only 5 to 15 universities could match (but see (4) below).

The public relations move should not be underestimated. Harvard is no doubt already under pressure to move from a stated need-based financial aid regime to one that puts more money where it might be most inclined to attract students it wants. The best minority applicants receive increasingly attractive offers from other schools, and the same may be true for athletes Harvard wants. The single tool of a percentage cap on expected contributions from middle –income families is likely to get at many such targets. It is far more palatable, saleable, and legally viable than separate policies regarding minority students and athletes.

University administrators outside of Cambridge tend to respond to every Harvard initiative with “How else should they spend all that money?” But there are many other ways to spend. A better version of (2) might be that a much larger fraction of Harvard families will now feel a direct connection to Harvard’s wealth. This brings me to the intergenerational point. Universities should fear that future alumni will be less generous than their predecessors. The problem is that college admissions is more of a competitive game on both sides of the transaction. Parents (and some students too!) work hard to get in to Harvard, but anyone who is accepted surely has offers from many other schools. A graduate from 1960 who has accumulated great wealth is now very grateful to Harvard for the opportunities and financial aid that education created. But a graduate from 2000 or 2010 might well reason later that theirs was a financial transaction. Harvard gave money but other schools offered money as well, and it is possible that no special gratitude will be felt. I think Harvard might best be seen as making a good investment. It is trying to ensure that a large fraction of graduates will be grateful and will feel that other schools would not, in fact, have provided as much money – or that if they would have it is in part because Harvard forced them to do so.

There is more going on here. An elite university could cut back on the perks of a modern undergraduate education, but thus far all rush to build nice dorms and gyms and junior-year-abroad programs. A middle-class student now at college may well live at a standard higher than previously experienced at home. This new development in “education” is a somewhat different subject, for we should hardly expect Harvard and Yale to be the market leaders in de-frilling the college experience. The mix of graduate and undergraduate students – and financial aid policies – is another part of this subject. In fact, more generous graduate aid has preceded the move in undergraduate financial aid. But for today the news is focused on undergraduate aid and the immediate question is how many schools will respond with similar plans.

Comments

[Citations]

I agree that the intergenerational bargain is the most important of the ways you suggest we could think about Harvard's strategy. But I think several stories can be told about this bargain.

For example, more parents now are feeling a double crunch: paying for college educations for their children while bearing responsibility for aging parents with substantial medical bills. Maybe this is a story of shifting generational burdens backward instead of forward.

Maybe it is, as you suggest, a story of investment in future gratitude. Certainly I'm grateful for my scholarship and plan to repay it and more, when I am able. But I think people can view their education as a financial transaction regardless of when they graduate or the level of financial assistance they receive. So I don't think the whole story can be told by either cynical strategies of gift-giving or obligatory gratitude.

We pay more than money for an education, and hope to receive more than we can learn by reading a book. So Harvard's move could be a story about signaling functions, taking cost off the table so that everyone can concentrate on the education itself. Perceived value is a story that can be told about any education, and any financial aid scheme.

In other words, it could be a story about a university making good on statements that its mission is to create an community of learning, not a business in which students are both product and customer but primarily a source of income.

But there you have the perspective of someone who is forking over more than $100,000 a year in college tuition bills.

[Kimball Corson]

This is just the beginning for Harvard, I believe. With an endowment at $35 billion and growing still, in time -- as things settle down -- Harvard will be able to pay all of its students' room, board and tuition so that money will no longer be a troubling issue for students, successful applicants or the University, at least not in the conventional way. This isssue will remain, getting in, the point on which future gratitude will hinge. Harvard is developing a tremendous competitive advantage here and I think will use it aggressively in competing for students and faculty. It has truly stepped into a new league of its own.

[Anon]

If Harvard & Yale are trying to reach out to more lower and middle class students, don't you think this will hurt their alumni donations? Significant wealth takes many generations to accrue for the most part; most of these students are destined to be upper-middle-class professionals. After paying for their snazzy house in a posh suburb and private school for the kiddies, how much money is really left over for most of these people to donate to their alma mater?

[Kimball Corson]

But with such a portfolio, alumni contributions are not as important as they once were and Harvard can reach out now to the middle and lower classes (or whereever intelligence is found)and still do well financially. Too, some money tends to accumulate around people who are bright and well educated, regardless of their backgrounds. Finally, more and more, fortunes are made in a single generation, especially in high tech (or human capital intensive areas)where ideas and not intergenerational physical capital accumulation is involved.