Ivy League Shares The Wealth

Tuition at private universities has skyrocketed over the past 20 years, but over the last few months a number of elite institutions have unveiled plans to make college more affordable for undergraduate students.

Since December 2007, seven of the eight Ivy League universities have announced major overhauls to their financial aid offerings, which in most cases substantially increases aid for low- and middle-income families.

It may be no coincidence, however, that this financial aid windfall comes just months after the Senate Finance Committee held public hearings on the cost of higher education, focusing on ballooning tuition and tax-exempt endowments.

Ivy League Takes The Lead

Harvard University was the first Ivy to outline expanded financial aid through enhancements to grants, the elimination of student loans and the removal of home equity from financial aid calculations.

Under the plan, families with incomes between $120,000 and $180,000 will pay a maximum of 10 percent of that income toward annual tuition.

For those with incomes below $120,000, the family contribution percentage will decline steadily from 10 percent, reaching zero for those with incomes of $60,000 or less. Harvard is using, in part, it's $30 billion endowment to help reduce its nearly $50,000 a year price tag.

"We want to make Harvard affordable for talented students from all financial backgrounds, and once they are here, we want to make sure they are able to take full advantage of the opportunities we provide," said Michael D. Smith, Dean of the Faculty of Arts and Sciences. "This experience is not possible if families are consumed with financial worry and students are consumed with debt."

After Harvard's announcement, Yale, Brown, Cornell, Dartmouth, the University of Pennsylvania, Columbia and a number of non-Ivy private universities followed suit.

Columbia University_23813572
Brooke Sopelsa for CNBC.com

Columbia, for example, announced in early March that it would be replacing all loans with grants for families making as much as $150,000. In addition, it is eliminating tuition, room, board and fees for students from families with incomes of less than $60,000. In addition, it is significantly reducing tuition for those with less than $100,000.

"The calibration has to do with how many kids are in the family, how many kids are in college at the same time", said Nicholas Dirks, Columbia's Vice President for Arts and Sciences. "But roughly speaking a family making $75,000 will have their tuition bill, in terms of what they actually have to pay, cut in half."

Columbia's decision was welcome news to incoming students, as well as current undergraduates, nearly half of whom receive some type of financial aid.

"I was just really relieved that it was going to be a lot easier for me to help pay for my college education," said Austin Brauser, a sophomore at Columbia. "That's just one of the main burdens of exiting college, [you] have years of debt to pay off and now that's not going to happen to me."

Congress Takes Note

Relief on campus follows something bordering outrage in Washington. Last fall, the Senate Finance Committee held hearings to discuss endowment growth and rising tuition costs. Since then, Sen. Chuck Grassley of Iowa, the ranking Republican on the panel, has been banging the drum for change.

"Tuition has gone up, college presidents' salaries have gone up, and now endowments continue to go up," said Grassley. "We need to start seeing tuition relief for families go up just as fast. College endowments have had a very good year. It's time for colleges to share more of their

Grassley adds that the issue also touches on tax fairness. Universities hold at least $340 billion in endowments, which enjoy tax-exempt status. American taxpayers are in essence subsidizing those tax-exemptions, and Grassley says they deserve something in return.

Most other tax-exempt entities, such as private foundations, have a mandatory pay-out requirement of five percent a year, and Grassley's office says such a requirement may be in the cards for universities.

In January of this year, Grassley and Sen. Max Baucus, D-Mont., who chairs the Senate Finance Committee, wrote to 136 universities with endowments of $500 million or more, seeking details on their endowment pay-outs and student aid.

The Congressional action comes as no surprise to Richard Vedder, director of the Center for College Affordability and Productivity.

"This move is a consequence of a multi-decade long rise in cost that far exceeds not only the rate of inflation, but the rate in growth of our own incomes," says Vedder. "Prices of colleges today are about double what they would have been had we just had the normal rate of inflation over the last generation."

When you include tuition, room and fees, the total cost of attending an elite private university, like Harvard or Columbia, hovers around the $50,000 a year mark. According to FinAid.org, between 1989 and 2005, college inflation was up 5.94%, while general inflation increased 2.99%.

Winners & Losers

The biggest winners, says Vedder may be somewhat surprising.

"The people who are benefiting most from the recent moves are not, as many might think, the low-income students who are very bright and get into the Ivy League schools," explains Vedder. "Those kids, for the most part, have been pretty well taken care of. The people who are going to benefit most from these things that are going on, most of these defacto tuition reductions in the Ivies, are people from families with incomes of $100,000 a year, $150,000 a year."

Harvard University
Harvard University

The private universities expanding financial aid hope the more generous terms will encourage even more qualified students to apply -- those who may have previously been scared away by the steep price tag.

"Our expectation is that as the word gets out, that actually financial aid is real, that when we say we're going to give full need and now full need includes, for example this provision that they don't have to take out loans, there will be more students applying," said Dirks of Columbia

That seems to be the case at Harvard, where applications were up 4,000, or 17 percent, over a year ago -- more than usual.

Under the new plans put forth by Columbia and its peer institutions, a private university will end up costing less than a public university for many students. This is great news for students, but not for competitive public schools, such as the University of California at Berkeley or the University of Michigan.

"I think the public Ivies are going to take a hit," says Richard Vedder.