Anyone who has managed repayment of a large student loan or a home mortgage knows that a small change in the interest rate can have a huge impact on the overall cost of a loan. Similarly, seemingly small changes in the way colleges treat the home equity of students' families can have a major impact on what middle class families need to contribute.
On Wednesday, Stanford University announced such a change , and while they have not gone public until now, leaders of a group of elite private colleges confirmed that they too had recently changed the way they consider home equity. In both cases, middle class families could find themselves paying several thousand dollars less than they do now to have their children attend some of the most prestigious colleges in the country.
Officials who are making these changes say that they represent much-needed relief for middle class families, especially those who bought homes 15 or more years ago and have seen their values skyrocket to make them millionaires on paper, but not necessarily with incomes or bank accounts to match. Proponents said that some middle class students are being discouraged from attending top private institutions and that these changes might change that. While the moves are generally being applauded by aid experts, some cautioned that this help -- however welcome to the middle class -- might not have a huge impact on who goes to which colleges.
At Stanford, the change concerns the ceiling placed on the home equity that counts as family wealth. Up until now, home equity went into the formula up to two times family income. That ceiling will drop to 1.5 times family income -- a change that by itself will probably mean that most families will have to pay about $2,000 less to send their children to Stanford. Additions to scholarships will further cut the family cost.
While Stanford announced its change, the "568 colleges" did not. These 28 private institutions  are known by a portion of a law that allows private institutions that admit students without regard to financial need to discuss some aid policies without fear of antitrust charges being brought against them. The 568 group's common policies are not requirements for their members -- which include Ivy League institutions, top liberal arts colleges and others -- but are highly influential.
The 568 colleges' guidelines have changed more radically than just lowering a ceiling. Until this year, the formula was based not on home equity, but home value -- up to 2.4 times family income, minus mortgage debt. That is being changed -- and used for the first time in aid packages being prepared now for this fall's freshmen -- to be based on home equity, up to 1.2 times family income.
James Belvin Jr., director of financial aid at Duke University and chair of the Technical Committee of the 568 colleges, said that institutions that use the new approach will in effect be saving middle class families thousands of dollars each, each year the formula is used. Duke is among the institutions that have adopted the new 568 methodology.
As home equity calculations are becoming a differentiator among top institutions, some universities are going even further. Harvard University, which like Stanford is not a member of 568, has abandoned the idea of having any rule about home equity. "Harvard is flexible in considering home equity: ignoring it entirely in some cases and taking it into consideration in others," said a spokesman in an e-mail.
Why is home equity attracting so much attention right now? "I think it's an effort to extend up the income distribution level some of the consideration for the customers that colleges have increasingly been giving high-ability, low-income students," said Gordon C. Winston, director of the Williams College Project on the Economics of Higher Education. Winston noted that elite private colleges have made a series of announcements in recent years,  ending the need for low-income students who attend their institutions to borrow to do so.
In some of those announcements, one college has topped another, not wanting to be seen as less generous. Asked whether the moves by Stanford and the 568 colleges would lead to similar competition, Winston said "hell yeah." But he added that it was "more than a calculated price reduction." Rather, he said that colleges have put in place good aid policies for low-income students and need to do more for those students not by changing aid policies, but by recruiting and admitting and graduating more of them. The middle class student, on the other hand, needs new policies, Winston said.
For Stanford, home equity tends not to be a factor for low-income families, but is a big issue for the middle class. About 40 percent of new students at the university are from California, where housing prices have soared so high that home equity may no longer reflect family wealth, said Karen Cooper, director of financial aid.
Cooper said that the issue presented itself in several ways. Many families would just call up after receiving an aid package and express shock about the estimates of their wealth. Since the families couldn't afford to buy another house, they didn't consider their home equity a true asset, even if Stanford was only asking (and is still only asking) for a very small share of it. Last year, Cooper said, Stanford surveyed the families of juniors and seniors and the issue came up repeatedly.
"Middle class families were telling us that that while they would make this sacrifice again, it had been very, very difficult," she said. The survey also allowed families some space to elaborate and this was an issue on which they were "very willing to share stories."
Cooper said that she would have liked to have lowered the ceiling even more, but that it would cost too much. She said she hoped the university would be able to do so in the future.
Belvin, of Duke and the 568 colleges, said that his members were seeking a balance. The concerns being expressed by many middle income families are real, he said. But at the same time, "home equity is reflective of a family's financial strength," he said, and leaving it out altogether would make some families eligible for more aid than they deserved and would be "unfair to those who don't own homes."
He also stressed the importance of individual analysis of aid applications. Home equity is a tricky issue because home values vary so widely, and people use their homes financially in many different ways -- for businesses, as a retirement nest egg, etc. The idea of the new methodology is not "to have everyone in lockstep," but to have a system that is more fair, and a system "to which professional judgment can be locally applied." In some cases that professional judgment might add to an expected family contribution and in other cases, the opposite would be true. "The thing for our group is that we've always really been trying to do the right thing," he said.
Robert Shireman, founder of the Project on Student Debt,  said he was largely comfortable with the push to help the middle class, even though he is a critic of elite private colleges for not enrolling enough low-income students. But he agreed with Winston that the problem there "isn't aid policy," but recruitment and admissions policies. He said that, because Stanford and many members of the 568 colleges have substantially improved their aid packages for low-income students, he thought this new effort was "OK."
Donald Heller, who has written about access issues extensively, agreed. "It all depends on the opportunity costs," said Heller, an associate professor of education and senior research associate at the Center for the Study of Higher Education, at Penn State University. Heller also warned that while the changes would help middle income students, it might not change enrollment patterns.
"This could be tinkering at the margins," he said. "There is a lot of complaining by the middle class about these charges, but the fact is that the middle class students are going to college," he said.