A handful of schools have instituted policies that ensure that low income students have no loans in their financial aid packages. These are also referred to as "free tuition" programs for low income students.

Typically low income is defined as the bottom quintile by family income, such as family incomes below about $40,000, by Pell Grant eligibility, or families with incomes below 200% of the poverty line.

Types of No-Loans Policies

The policies fall into four main types:

• No loans. These policies eliminate loans from the financial aid package of low income students. In Princeton's case, the loans are eliminated from the aid packages of all students, not just low income students. Other schools with no loan policies for low income students include Rice University, UNC Chapel Hill, University of Virginia, and the University of Pennsylvania.
• Loan caps. These policies institute a low cap on student loans for low-income students. Examples of schools with such policies include Brown University.
• No parental contribution. These policies eliminate the parental contribution, but retain the student contribution along with the standard self-help level. So these policies may still require some loans in the aid package, albeit a reduced amount. Examples of schools with such policies include Yale and Stanford.
• Pell grant match. These policies match the student's Federal Pell Grant. This significantly reduces but does not eliminate the self-help level. Examples of schools with such policies include the University of Minnesota system.

Good Public Policy

The justification for such a policy is that the existence of debt in the financial aid package has a much greater impact on matriculation rates among lower income students than among middle and upper income students. Lower income families fear debt and have much less experience with debt than middle and upper income families. What little experience they have with debt is much more likely to be negative. Even when you tell them that they will be able to get a good job and easily repay the debt after they graduate, the idea that they will have to borrow more money than their parents earn in a year has a chilling effect on enrollment. It presents them with a psychological barrier against matriculation.

Middle income students don't like having to borrow to pay for their education, but it doesn't stop them from matriculating to the same degree as lower income students. With lower income students, the form of the financial aid matters almost as much as the amount of aid.

Given that the goal of financial aid is to promote access to higher education, both the amount and the types of aid need to be tailored to the populations the college is trying to serve. Otherwise, promoting access without facilitating matriculation presents these students with an empty promise.

Overall, eliminating loans from the financial aid packages of low income students is a good way for colleges to fulfill their charitable mission.

Impact of No-Loans Policies

Princeton was the first college to eliminate loans from the financial aid packages of low-income students, initiating the trend in 1998-1999. The number of low income students matriculating at Princeton has doubled from 1998-1999 to 2005-2006.

After Harvard University instituted its policy of eliminating the parental contribution for low income families, it saw a 20% increase in the number of low income students matriculating, according to

Christopher Avery, Caroline Hoxby, Clement Jackson, Kaitlin Burek, Glenn Pope and Mridula Raman, Cost Should Be No Barrier: An Evaluation of the First Year of Harvard's Financial Aid Initiative, National Bureau of Economic Research, NBER Working Paper #12029, February 2006.

Both are significant increases. The greater relative increase in the number of low income students at Princeton suggests that a strict "no loans" policy has a greater impact on matriculation rates among low-income students than a no-parental-contribution policy.

The Chronicle of Higher Education reported that another NBER study showed that replacing loans with grants in the financial aid packages of low-income students increases the likelihood that the college graduates will pursue careers in public service. That study, by Jesse Rothstein and Cecelia E. Rouse of Princeton University, reported that an extra $10,000 in debt corresponds to a 5% to 6% decrease in the likelihood of pursuing a public service career.

The Journal of Blacks in Higher Education reported declines in the percentages of low income students (as demonstrated by the number of Pell Grant recipients) at elite colleges. This mirrors the results of a similar analysis previously conducted by the Chronicle of Higher Education. The Chronicle found that a very small percentage of students at the wealthiest colleges receive Pell Grants.

Clearly, it is easier for a college with very few low income students to eliminate loans from the financial aid package than a college with a smaller endowment and a much greater percentage of Pell Grant recipients. But the elite colleges also need to do more to help low income students. As the elite colleges become more selective in their admissions policies, they are crowding out lower income students who did not have the same advantages as their wealthier peers. Extending no loans policies to all students and reducing costs for middle income families in addition to low income families increases competition for admission and can potentially reduce the number of low income students being admitted. The elite colleges need to consider that a student who overcame the disadvantages of a low income background may be more impressive than a talented student who has never been tested by adversity. After all, low income students often have to supplement their family income or even act as the primary wage-earner for their family, leaving little time for extracurricular activities or schoolwork. Perhaps the elite colleges should establish admissions preferences for low income students?

So far about two-fifths of colleges with endowments in the billion dollar plus range have adopted no-loans policies. Any college where the endowment per FTE enrollment exceeds $500,000 can afford to eliminate loans from the financial aid packages of low income students. (Technically, if the endowment per enrolled student multiplied by 5% and divided by the percentage of Pell Grant recipients exceeds the cost of attendance, the college can afford to be generous to low income students.) Colleges with smaller endowments are unlikely to adopt such policies because they cannot afford to do so. (In some cases smaller colleges are able to adopt such policies by limiting them to students who graduate from nearby high schools or by limiting the no loans policies to tuition and fees.) To eliminate loans from the financial aid packages of low income students, Congress would need to double the maximum Pell Grant, as was advocated in Leo Kornfeld and Mark Kantrowitz, A New 'Independence Day for Student Financial Aid, The Chronicle of Higher Education, 53(23):B11, February 9, 2007. Such an increase in need-based grants would likely pay for itself through increased federal income tax revenue.

If smaller colleges want to institution a no loans policy, they will usually need to limit it in various ways. First, they will need to limit the policy to just low income students, such as students whose families earn less than $50,000 (or some other threshold, perhaps based on a multiple of the poverty line) or who are Pell Grant recipients. They main have to retain a self-help level of $2,500, which the students can earn from the work-study program (or, at the student's option, borrow from the federal loan programs).

Genesis

The first college to adopt a policy eliminating loans from the financial aid packages of low income students was Princeton University in 1998-99. They expanded this policy to all students in 2001-02. This was followed by the University of North Carolina at Chapel Hill in 2003-04 and the University of Virginia in 2004-05. But the number of colleges didn't start expanding rapidly until the Advisory Committee on Student Financial Assistance (ACSFA) issued its report, Mortgaging Our Future: How Financial Barriers to College Undercut America's Global Competitiveness in September 2006. This was the first study of "pipeline leakage" to quantify the impact of financial constraints on enrollment and graduation by college-capable low income students. The Kornfeld-Kantrowitz op-ed in the Chronicle of Higher Education in February 2007 also advocated for eliminating loans from the financial aid packages of low income students.

Pressure on colleges to increase funding for student financial aid also increased in September 2007, when Senator Charles E. Grassley of Iowa proposed requiring wealthy colleges to spend at least 5% of their endowment funds, mirroring an existing requirement for private foundations. According to data from the National Association of College and University Business Officers (NACUBO), colleges with endowments of more than $1 billion spent 4.6% in 2006 and colleges with endowments of $500 million to $1 billion spent 4.5%.

Colleges do not necessarily have the flexibility to increase their endowment spending on student aid, since the endowment funds are often subject to donor restrictions. Unrestricted funds and funds for student aid represent a small percentage of the overall endowment. (Yet money is fungible, so increasing spending from restricted funds may free up some money from the operating budget for student aid.) Colleges also argue that they are being careful to preserve the spending power of their endowments to allow them to weather economic downturns when investment losses decrease the size of the endowment, such as occurred in 2001 and 2002, and to compensate for inflation. Endowment income is also used to balance out fluctuations in gift-giving to the colleges. However, the adoption of a no loans policy provides a good motivation for alumni contributions, and several colleges have launched fundraising campaigns for this purpose.

Caveats

These policies eliminate or reduce loans in the financial aid package. They do not affect loans for students who do not receive financial aid. They also do not prevent a family from borrowing from non-need-based loans, such as the unsubsidized Stafford Loan, the PLUS loan and private student loans, to pay the expected family contribution. Thus students at these colleges may continue to graduate with debt, although much less debt than before.

In addition, colleges that have not eliminated the student contribution are effectively retaining a self-help level. If the student is unwilling or unable to use savings or work to pay the self-help portion of the financial aid package, they will have to borrow instead. So even though federal need analysis shelters work-study and a portion of non-work-study earnings, even students with a zero EFC will need to work or borrow at schools that maintain a self-help level. Also, retaining this self-help level effectively establishes a caste system on campus, where the poor work to serve the needs of the wealthy.

Colleges Eliminating Loans from Financial Aid

Colleges that have eliminated loans from the financial aid packages of all undergraduate students include Princeton University, Davidson College, Williams College, Amherst College, Harvard University, Pomona College, Swarthmore College, Haverford College, University of Pennsylvania, Yale University, Bowdoin College, Dartmouth College, Stanford University, Wellesley College, Columbia University, Claremont McKenna College and Vanderbilt University.

The following table lists colleges that have taken steps to significantly reduce or eliminate the self-help level or eliminate loans from the aid package for lower income students.

Other colleges, such as Deep Springs, Webb Institute, Cooper Union, Curtis School of Music, Franklin W. Olin College of Engineering, College of the Ozarks and Berea College, don't charge any tuition, but they do charge for room and board, so loans are still required, just not as frequently or as much. Likewise for the US Military Academy and US Naval Academy.

The Georgia HOPE Scholarship provides funding for tuition, fees and books ($150) for Georgia residents with a 3.0 or higher GPA attending public or private colleges in Georgia. At some public colleges like the University of Georgia this may result in the elimination of loans from the financial aid packages of some low-income students (e.g., students eligible for a full Pell Grant).

The Project on Student Debt's Financial Aid Pledges to Reduce Student Debt has a similar list of schools that have instituted policies to eliminate or limit debt in the financial aid packages of low and middle income students. Their list was initially based on the list compiled by FinAid.

Increasing Competition Among Elite Colleges

The following histogram shows the number of colleges eliminating loans from the financial aid packages of low income students each year. It counts both colleges that first introduced such policies in the specified academic year as well as colleges that improved their policies.

To date, 72 colleges have adopted no-loans policies and 1 college has adopted a significant reduction in loans for low income students.

Other Resources

Some colleges who are unable to afford to eliminate loans from the financial aid packages have instead opted to adopt level or guarantee tuition rates where the tuition or cost of attendance is locked in for four years.