In a wide-ranging financial aid initiative unveiled yesterday, Harvard said it will significantly reduce the expected contributions from middle- and upper-class families and eliminate loans for all undergraduates.

Students whose families make between $120,000 and $180,000 per year will now pay only 10 percent of their yearly income to the College, cutting costs to those families by between one-third and one-half, according to a University statement.

Undergraduates whose families make between $60,000 and $120,000 per year will contribute between zero and 10 percent of their income on a graded scale under the new initiative, to take effect next fall.

“This is a huge investment for Harvard, but there is no more important commitment we could make,” University President Drew G. Faust said in a statement. “Excellence and opportunity must go hand in hand.”

Dean of Admissions William R. Fitzsimmons ’67 said the new aid will allow Harvard to compete with tuition fees at flagship state universities, where the average cost of attending for in-state residents is $13,589, according to the College Board. It currently costs $45,620 to attend Harvard, according to the Financial Aid Office Web site.

A family making $120,000 per year currently pays about $19,000 to Harvard, which would be reduced to about $12,000 under the new initiative.

Fitzsimmons added that the admissions office hopes the program will encourage students to choose the college which offers the best fit, not the lowest cost.

Families making between $60,000 and $200,000 find themselves in a “real state of crisis” with respect to paying for college, Fitzsimmons said, as they are neither poor enough to receive exemption from tuition fees nor are they rich enough to absorb the high costs.

The new program eliminates both the expectation that students take out loans to pay for tuition and the use of home equity in calculating a family’s ability to pay—though neither of these changes will apply retroactively, Fitzsimmons said.

Fitzsimmons said he hopes increased financial aid—within the College and across the University—will allow students to pursue careers in public service without fear of outstanding debt from tuition fees.

The program builds on the Harvard Financial Aid Initiative (HFAI), which in 2004 eliminated tuition costs for families making less than $40,000 per year and was expanded in 2006 to eliminate contributions from families making less than $60,000.

In response to questions about Harvard’s new initiative, Yale’s president, Richard C. Levin, told the Yale Daily News yesterday that the university would make a major announcement regarding financial aid in January.

Harvard’s new financial aid plan, affecting families that have historically received less financial support, requires a greater financial commitment from the College.

This expansion in aid will increase the College’s grant budget from $98 million to almost $120 million, significantly more than the $2 million increase in the budget when HFAI was created.

“With the HFAI program, we were already awarding significant need-based financial aid,” said Director of Financial Aid Sally C. Donahue, contrasting HFAI with the new initiative.

In a conference call with reporters yesterday, Faust said the program will be paid for using a variety of sources, including the presidential discretionary fund and Faculty of Arts and Sciences funds.

Faust said that she hopes that the University’s upcoming capital campaign will include a “substantial emphasis on financial aid.”

Faust added that she is also considering ways to improve graduate student financial aid and will make an announcement in the near future.

—Laurence H.M. Holland contributed to the reporting of this story.

—Staff writer Aditi Balakrishna can be reached at balakris@fas.harvard.edu.