May 16, 2007 — Say No to Debt?

A North Carolina college trades additional financial aid for loans to make itself more affordable. Will the change attract a broader-based student body?
By Charles Gerena

Davidson College, a liberal arts college north of Charlotte, N.C., recently announced it would join a small number of other schools that have eliminated the need for students to borrow money. Starting this fall, those who cannot pay Davidson's tuition and qualify for assistance will have all of their financial needs met by grants or money earned through work-study programs. (Students can still obtain loans on their own, but this will not be part of the standard package offered by the school.)

The move is intended to keep Davidson open to people of all income levels while reducing the debt that's burdening students. Whether it will work remains to be seen. Harvard University, which no longer requires parents making less than $60,000 a year to pay a dime of their children's education, has succeeded in attracting more low- and middle-income students while reducing the median debt levels of graduates. What is certain is that shifting more of the cost of higher education from students to schools requires some form of economic trade-off.

A study conducted by Davidson officials revealed that many students needing financial aid never apply to the school because of the "sticker shock" of the $31,794-per-year tuition. (Room and meal costs tack on about $9,000 to a student's annual expenses.) By eliminating loans from the school's standard financial-aid package, officials expect to see more low-income students applying and enrolling. The percentage of Davidson students receiving need-based aid is expected to increase from 33 percent to 40 percent.

Davidson won't use tuition increases to fund its new policy. Instead, operating reserves and donations will be used in the short term. In the long term, the college will boost its fund-raising to enlarge the college's $421.7 million endowment. Officials estimate they will have to raise $70 million to make up for what students would have borrowed.

Following Davidson's lead won't be painless for many schools. A majority of colleges and universities have endowments of less than $100 million to build upon, so they would likely have to divert money from other pursuits to fund additional financial aid.

"It's a very difficult balancing act" for liberal arts colleges, says Ronald Ehrenberg, director of the Higher Education Research Institute at Cornell University. They have to weigh maintaining the quality of their undergraduate programs — which is reflected in faculty size and salaries, and the facilities they provide — against maximizing the number of students they can attract. "If you are a really wealthy university like Harvard or Princeton, you can do whatever you want. But other [schools] have to make these trade-offs." (Unlike Davidson, the schools that have eliminated loans from their financial-aid offerings typically have been large, research-oriented universities.)

Sandy Baum, senior policy analyst for the College Board, points to another trade-off that school administrators have to think hard about. Is it better to give large grants to a few students so they don't have to borrow, or to provide smaller grants to more students and allow them to borrow a little money to make up the difference? While she is sympathetic to Davidson's new policy, she would opt for the latter approach.

"It is an issue that many students are borrowing too much," Baum says. "But it's fine for students to borrow money to go to high-quality, selective schools that are expensive."

How much borrowing is too much? Baum says it depends on the field that students want to work in — they shouldn't borrow more than what can be repaid based on their expected annual salary after graduation. "If you're studying engineering, it's OK to borrow more than if you're studying fine arts."

Davidson College officials, however, are reluctant to have its students make curriculum choices based on financial considerations. In a March press release announcing the policy change, Christopher Gruber, Davidson's dean of admissions and financial aid, said students "often graduate with a burden of debt that limits their choices in career and postgraduate education."

This is an important matter for liberal arts colleges that promote personal growth and civic leadership. It's especially important to Davidson, which has historical ties to the Presbyterian Church. According to one alumnus who posted on the college's blog, the new policy will enable more graduates to afford pursuing a career in the clergy.

"There is a concern that large loan burdens may preclude students from choosing occupations which are socially valuable but not financially remunerative, like teaching, social work, and nursing," Ehrenberg notes.

Still, eliminating loans from a college's financial-aid package may be too extreme, analysts like Ehrenberg and Baum say. Rather, they suggest forgiving loans for students who enter certain fields.

Many law schools already offer forgivable loans to students who take positions in government, nonprofits, and other public-interest areas. And the federal government will cancel all or part of a Perkins Loan if students teach special education, work at schools in poor communities, or have a specialty that is in short supply in a particular state.