Parents who earn less than $40,000 a year will no longer be asked to contribute to the cost of their children’s Harvard education, University President Lawrence H. Summers announced Saturday.

The financial aid plan, which goes into effect this September, will also cut costs for families who earn between $40,000 and $60,000 annually. Parents in that income bracket will—on average—see a reduction in their yearly tuition bill from $3,500 to $2,250, according to Dean of Admissions and Financial Aid William R. Fitzsimmons ’67.

The new aid initiative, which increases the College’s annual scholarship budget by $2 million, will affect both entering and returning students starting next year. The changes will benefit the families of about 1,000 undergraduates, according to University estimates.

“This is one of Harvard’s finest moments and an important symbol to higher education for the next several decades,” Fitzsimmons said.

Saturday’s move makes Harvard the first school to eliminate parent contributions for families earning less than $40,000 a year, said Sally C. Donahue, the College’s director of financial aid.

University officials described the move as part of a broader effort by Harvard to address rising income inequality.

“The most serious domestic problem the U.S. faces today is that the gap between the life prospects of children from different family backgrounds has widened significantly over the last generation,” Summers said in an interview with The Crimson yesterday.

“Higher education needs to make a greater contribution to fairness. We believe that eliminating the parental contribution for most low and moderate income families is a very constructive step that Harvard can take,” Summers said.

The announcement of the new financial aid formula came in advance of Summers’ keynote address yesterday to the American Council of Education’s annual meeting in Miami.

“It behooves us to ask whether we in higher education are doing enough,” Summers said, according to the prepared text of the speech. “I believe that we are not.”

“Let us make sure that the American dream is a possible dream for every child in the nation,” said Summers, whose presidential discretionary fund along with Faculty of Arts and Sciences money will cover the initiative.

The University unveiled changes to its scholarship formula just two days before the March 1 deadline for prospective members of the Class of 2008 to file aid applications, although Fitzsimmons said today’s deadline was unrelated to the timing of the announcement. For returning students, the deadline to apply for aid for the coming academic year is Sept. 1.

The move to improve financial aid is part of a wider University initiative outlined in the Saturday announcement to bring more students from low-income backgrounds to Harvard.

A study last year by the Century Foundation, a New York-based think tank, found that Harvard placed last among Ivy League schools in the percentage of its students receiving federal Pell Grants, which are designed to help members of low-income families afford college.

In his address to the council, Summers said that the admissions office “has intensified its efforts to reach out to talented students across the nation who might not think of Harvard as an option.”