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Stop Financial Aid for Wealthy Students

Stop Financial Aid for Wealthy Students

November 5, 2009

In the space of several months in late 2007 and early 2008, Harvard, Yale and several other highly selective universities enriched their financial aid programs to guarantee that students from families well up the economic ladder would get sizable grants to attend their institutions. The announcements, which came as the country's wealthiest universities were under Congressional pressure to spend more from their endowments, helped to quiet that criticism and won applause in many circles.

As we are all painfully aware today, the changes were made at the beginning of a recession that has gripped the nation and shrunk the value of the endowments at those very same institutions by roughly 25 percent, forcing major cutbacks. For that and other reasons, I would argue that Harvard, Yale and others should roll back those financial aid programs, or suspend them temporarily, to use the money for purposes that better serve more students and the institutions' missions.

Harvard’s program, for example, guarantees that students from families with incomes between $120,000 and $180,000 pay no more than 10 percent of their family’s income to obtain a Harvard education ($180,000 puts one at about the top 10 percent of all families in the country). At this year’s cost of $52,000, this means that Harvard gives every one of these families a grant ranging from $34,000 to $40,000. Yale’s limit of $200,000 reaches families at the 95th percentile.

Few would argue that students from low- and middle-income families should not benefit from the sizable endowments still held by these universities. But no definition of “middle income” would include families in the top 5 or 10 percent of all in the nation.

These universities are all very reliant on spending from their endowments to subsidize their annual operating budgets. In recent years Harvard, for example, relied on endowment earnings to fund approximately one-third of its operating budget; Yale, over 40 percent. Thus, a large decline in the value of the endowment, with a concurrent drop in earnings, has an immediate and negative impact on universities’ ability to fund their operations.

The impact of the declining endowment values has been seen in layoffs announced by many of these universities. While not the first time they have laid off employees, the scope of the reductions is largely unprecedented in higher education. Harvard announced last June that 275 employees would lose their jobs. In the last eight months, Stanford has laid off over 400 employees.

Some could argue that reducing university payrolls is not necessarily a bad thing, as many have suffered from administrative bloat in recent years as more and more staff positions were added without offsetting reductions in other areas. And reducing payrolls is not the only step universities are taking to tighten their belts. Many have also frozen salaries, reduced hiring, and in Harvard’s case, delayed much of its development of land it had acquired in Allston, a working-class neighborhood of Boston across the Charles River from its main campus in Cambridge.

Many indications are that it will be some years before university endowments return to their pre-recession levels, meaning that these institutions will have to endure further constraints in their operating budgets. There is an additional step that to date none have taken that would help them cope with these reductions: rolling back the financial aid programs they implemented two years ago that provide generous grants to wealthy families.

As noted earlier, many of these financial aid programs are benefiting the top 10 percent of all income-earning families in the country, and these families enjoy discounts of over $30,000 per year, or more than $120,000 over four years of college. Research on college access is very consistent in showing that students from these families are almost entirely price insensitive; that is, they are willing to spend $50,000 or more on a college education even without the discounts being offered by the universities.

While a student may choose not to attend one of these elite universities if she does not receive a discount, she is almost certain to attend college elsewhere. And with a surplus of applicants these colleges enjoy (Harvard accepted only 7 percent for this fall), it is hard to argue that the institutions would be hurt by the elimination of these programs that offer “welfare for the wealthy.”

The money saved could be put to better use on campuses, such as by reducing payout from endowments (thus conserving more capital to be plowed back into rebuilding endowment values), or by restoring some of the services and jobs cut by recent layoffs. Until endowment values return to their previous levels that were high enough to sustain offering financial aid to such wealthy families, universities would be better off suspending these programs.

Bio

Donald E. Heller is professor of education and senior scientist, and director of the Center for the Study of Higher Education, at Pennsylvania State University.

 

 

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