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.”

The College has increased its scholarship budget, which will now rise to just under $80 million, by 49 percent in the last six years. According to Donahue, Harvard has substantially cut the amount students are expected to contribute to their tuition payments—from $7,000 in 1998-1999 to $3,350 this year.

Fitzsimmons said the changes announced Saturday would not affect student contribution requirements.

Summers said yesterday that Harvard has no intention of copying Princeton’s “no loan” policy, which in 2001 eliminated student loans from initial aid awards.

“It’s better for students to have choices between borrowing and term-time jobs,” Summers said in an interview.

Donahue and Fitzsimmons said that under Harvard’s current program, undergraduates can choose to graduate debt-free if they work approximately 12 hours a week during the academic term.

But Donahue said that Harvard’s aid program allows undergraduates to take on student loans if they would prefer to concentrate on extracurricular activities during the school year.

The expected student contribution to tuition payments for Harvard undergraduates is approximately $1,000 larger than at Princeton, Fitzsimmons said.

According to statistics from Harvard’s Financial Aid Office, 35 percent of students at the College take out student loans. On average, members of the College’s Class of 2003 graduated with a student loan debt of about $8,800, compared to a national average of nearly $20,000 in debt per graduating student, according to the University.

Fitzsimmons said that Saturday’s move “has nothing to do with competitiveness with other schools and everything to do with addressing inequality of opportunity.”

But Harvard officials did not discount the impact Saturday’s move will have on other institutions.

“We hope this will serve as a stimulus for other schools to move in this direction as well,” Donahue said.

Summers’ high-profile announcement of the new financial aid formula forms a critical component of Harvard’s stepped-up outreach effort, according to Marlyn McGrath Lewis ’70-’73, the director of undergraduate admissions.

“Our expectation is that the news of the new program in and of itself will be very, very helpful in making tangible to prospective students our commitment to access,” McGrath Lewis wrote in an e-mail yesterday afternoon.

Fitzsimmons said that public school budget cuts across the country had left millions of students without access to adequate college counseling.

“If you’re out there in the real world on the wrong side of the tracks, it takes a long time to get into a position to be competitive as a candidate for America’s top colleges and universities,” Fitzsimmons said.

“We’re hoping that awareness of this financial aid program will be helpful in encouraging students in middle school and the later stages of grammar school to say, ‘it certainly is possible to go to a place like Harvard,’” he said.

To fine-tune its long-standing policy of giving a boost to applicants who have faced financial challenges, the admissions office has launched an effort to use ZIP code data to gauge students’ socioeconomic backgrounds more effectively, Fitzsimmons said.

Even though Harvard already has more detailed economic information for every applicant available through financial aid forms inside Byerly Hall, Fitzsimmons said Harvard’s “need-blind” policy prevents admissions officers from viewing that financial data when considering applications to the College.

But he said the Admissions Office is now using statistics on applicants’ neighborhoods to ensure that the Class of 2008 represents a broader range of socioeconomic diversity.

“You can tell a lot often by a person’s zip code,” Fitzsimmons said. “We can determine in a rough kind of way if students come from a socioeconomically disadvantaged background.”

The University’s move to reduce the parental contribution drew praise from students.

Aidin E. W. Carey ’07, a prospective history and literature concentration in Grays Hall, said the lighter financial burden on her family would allow her to devote more time to extracurricular activities, instead of working longer hours during the academic year.

Carey said the changes might allow her to work as a research writer for the student travel guide Let’s Go this summers. Without the changes, she said she would likely have had to stay home and take a higher-paying—but less educational—summer job.

Carey’s experience reflects the conclusions reached by University officials this fall after a series of focus group sessions with financial aid recipients.

According to Donahue, the focus group effort revealed that the burden of the parent contribution was being shouldered by students.

“Like many students today, I made up the parent contribution myself by working extra hours every week and taking out student loans,” said Fitzsimmons, who received financial aid as an undergraduate at Harvard four decades ago.

Many of the focus group participants also pledged to participate this summer in a new effort to reach out to students from low-income families.

According to Fitzsimmons, the new effort would be modeled after the Undergraduate Minority Recruitment Program, which he said operates primarily in the fall.

Summers characterized the financial aid changes as part of Harvard’s two-pronged effort to address the widening gap between rich and poor Americans.

“There are two aspects of this problem. Both are critical. The easier one—though still a very challenging one—is assuring that those with disadvantaged backgrounds see that they have a chance to go to Harvard and other great universities,” Summers said in an interview.

“The greater challenge is to work on the pipeline and assure that everyone—regardless of their background—gets a chance to prepare themselves for success,” he said.

In his Miami speech, Summers emphasized the University’s recent efforts to reach out to local students from low-income backgrounds.

In December, Harvard announced the creation of the Crimson Summer Academy, set to begin this July, which will bring 30 high-achieving students from area schools to Harvard for classes and college advising.

Each student will receive a $3,000 college scholarship upon completion of the three-summer-long program, in addition to a $200 weekly stipend during the program to replace summer job earnings.

—Staff writer Daniel J. Hemel can be reached at hemel@fas.harvard.edu.