One of the major policy issues in higher education today is President Barack Obama’s plan to rate American colleges on factors including tuition, graduation rates, debt and earnings of graduates, and the percentage of lower-income students who attend. Recently, we spoke with Catharine Bond Hill, economist and president of Vassar College, about at the challenges facing higher education. In recent years Vassar’s efforts to transition from the quintessential school for the wealthy to one that enrolls and serves many less affluent students have led it to do extremely well in this magazine’s annual ranking.

Hill, unlike many other administrators of private colleges, supports federal action to rate colleges and require more disclosure of information. She spoke about the efforts of her college to increase diversity, but argued that ultimately the problems poor and minority students face in attending and completing college in America can’t be solved by higher education alone; they’re a function of economic inequality. What follows is a transcript of our conversation, which has been edited for clarity and length.

Washington Monthly: Tell us about when you got to Vassar. What did you find there?

Catherine Bond Hill: When I got there in 2006 I’d spent several years as an academic doing work on low-income access and affordability to higher education.

I think it was about the year 2000 that Princeton announced they were going to move from having loans in their financial aid to grants. I think it was for low-income students at first and then they spread it out further. In my position as provost at Williams College I had to decide if that was something we were going to do. And we didn’t really know what we were asking poor kids to pay or even how many we had.

WM: You didn’t know that?

CBH: This was data from the late 1990s, when no one in higher education knew this. We knew what share of kids we had on financial aid and we certainly had the data on what their financial aid awards were but no one had really looked at if a family made $45,000 a year, what we were asking them to pay.

So a colleague and I started with a study of the Williams data. We found that Williams was charging the lowest income families—despite a commitment to meet full need—like 55 percent of their family income to attend. And we were not getting too many of those kids, unsurprisingly.

So then we attended the study to all of the COFHE [Consortium on Financing Higher Education] schools, a group of 31 highly selective, private liberal arts colleges and universities. We found the same thing. As a share of the sticker price we were giving low income kids a lot of financial aid but as a share of their family incomes weren’t giving them very much. These schools were only getting about 10 percent of their students from the bottom 40 percent of the income distribution.

So then I moved to Vassar. We replicated the work for Vassar. And it looked pretty much like the rest of the schools.

WM: Vassar now does very well on our rankings. How did you manage to do this ?

CBH: When we made this commitment to return to being need blind—a college that does not consider an applicant’s financial situation when deciding admission—it was 2007. Not the best timing. But the board was good about letting us spend more from our endowment.

WM: Did the percentage of the endowment money going to financial aid grow in general, or was it that the amount going to families of modest means grow?

CBH: Both. It went up from about $27 million in 06-07 to about $58 million last year. I think we’re low sixties this year. More than doubled. And the share of low-income kids has gone up significantly. We almost doubled the share of students of color on campus. We went from not having very many first generation students—we weren’t even aware enough of it to even keep good records of it—to now having between 80 and 100 [out of about 600] in the freshman class who are first generation.

WM: What sort of sacrifices did you need to make beyond tapping a higher level of the endowment?

CBH: Before the crisis we had let both faculty and non-faculty staff increase. We pulled that back, primarily by not renewing contracts, and also saved money through vacancies and retirements. That was a little harder. We had to make some changes to the curriculum, too. In the heady days before the financial collapse we would allow a class to go forward even if only two or three students registered for it. That doesn’t happen anymore. We also postponed on some renovating of buildings.

WM: How would you describe the old student body?

CBH: It was whiter and certainly higher income.

For the first few decades or so the people who were attending Vassar were the daughters of the elite. We had scholarship students but the vast majority of students were from wealthy families. There was a commitment to access, but it was gender access; the young women couldn’t go to Yale or Amherst then.

WM: The switch was relatively minor though. This is not like a Pine Manor shift where you turned around and began to focus on an entirely different, low-income, group of people, right?

CBH: Yes. But it shifted from 60 percent non-financial aid, 40 percent financial aid to 60 percent financial aid, 40 percent non-financial aid. And from 20, 22 percent students of color to 40 percent students of color, that’s big. Will it solve higher education’s problems? No, but at least it’s going in the right direction. And if other schools in our sector did it, it would be a great thing.

WM: But it’s not as if selective private schools are fixing this and now suddenly all doing right by poor and minority students. The trend has been the reverse for the last 20 years.

CBH: Before the financial crisis the trend was to try to increase diversity. In the 00s. Senator Chuck Grassley sent colleges with the top 150 endowments letters asking how we were using the earnings on the endowment. You saw a lot of schools shift to better net prices and more recruiting. We redid that in 2008. And the low-income average had increased by about 10 percent.

WM: Do you think the Grassley letter had an impact?

CBH: That and the fact that schools were doing really well on those endowments. They were also enrolling more students, improving buildings. The financial crisis set schools back.

WM: You think the Grassley letter mattered, but clearly that was just a letter and not statutory.

CBH: So, I’ve read your stuff, have you read mine?

American schools receive big subsidies from the federal government through Pell Grants, access to federal loans and special tax treatment for being nonprofit. Some 25 to 35 percent of our revenues probably come from these privileges.

One of the justifications for that is equal opportunity and social mobility, but it’s never been tied to that. We are institutions that respond to incentives, and if access to this federal money depended on us showing we were doing what the federal government was giving us money to do, behavior would change.

People say ‘you don’t want to get the federal government involved.’ Well, it’s already involved. They’re giving us all this money for a purpose. It seems completely reasonable for the federal government to ask whether they’re getting what they want.

WM: Is Vassar a member of the National Association of Independent Colleges and Universities?

CBH: Yes.

WM: Well that’s not the position that the association takes with regard to President Obama’s efforts to create a college rating system.

CBH: I mean, I’m in print talking about this. I do worry that we’re going to get a change in policy. Our real problem here is just an increase in income inequality in the United States.

There are two ways in which income inequality is making our lives more complicated. First, rich families are looking for schools that do certain things: small classrooms, nice dorms, nice athletic facilities, organic lawn care, and great food in the dining hall. So it pushes up our cost to compete for these kids.

And if we don’t compete for those kids and we don’t get them, then we lose a group of students who not only can pay the sticker price; it turns out these are really a pretty spectacular group of kids; they’re smart, creative, and hardworking. So they’re happy to pay the tuition and they want the services. If we don’t provide them they won’t come.

But second, low-income families have done really badly over the last 40 years. We’re committed to attracting them, but they now need more financial aid. So it’s a challenge.

WM: What can schools do?

CBH: Schools can attract the wealthy students and do a good job educating poor students affordably. But any one school that does it puts itself at risk.

But in the era of civil rights, the 60s and early 70s, our schools found a way to increase the racial diversity of the student body, because we thought that was in the public interest.

Rising economic inequality isn’t having that groundswell of political movement, but societally I think it’s starting to. The Occupy movement kind of died out, but the economic challenges people are facing is resonating.

If the federal government introduced incentives that made it better to allocate that dollar to financial aid than to something else then we would all respond to those incentives. But I don’t think we’re going to get it.

But institutions should be responsible for reporting their net price by income quintile. Reporting how many kids do you have by income quintile and what they really pay would be a really good way to hold schools accountable.

There is a certain shaming in higher education. Washington University was found to be so deficient in this area that its board of trustees could not ignore it. Even the University of Chicago, a well-respected, serious institution got into trouble about this.

And Wash U was the school that had 20 years ago figured out “enrollment management;” how to generate a class with the least amount of financial aid spending. They were on the road talking about that. Now that would just not be socially acceptable.

I’ve been very critical of U.S. News & World Report and their rankings, but not of their data. I think their existence started the movement toward schools having to be more transparent.

WM: They’re measuring colleges in the wrong way.

CBH: That’s right, though it hasn’t contributed to a lot of the cost increases. Cost increases are driven by income inequality and the demand on the part of high-income families. But rankings have created incentives for us to do stupid things.

WM: The idea of this being driven by the demand of affluent parents and students is interesting.

CBH: I think it’s really important.

The reason I started doing this work is that everyone kept saying “it’s not sustainable, it’s not sustainable” but I’m an economist. Higher education is an economic sector; if something’s not sustainable, we won’t keep doing it. What I was trying to figure out was why do things look worse now than they did 20 or 30 or 40 years ago? The rules of the game haven’t really changed all that much.

And the big thing is inequality. Higher education can’t fix that. That’s a result of government policy. Absent the government doing something about increasing income inequality it’s going to be very hard for higher education to address these issues.

WM: Let’s get back to the idea of a voluntary, civil rights-like effort on the part of schools to do better with this stuff.

CBH: I think we will get the ratings. I just don’t think we’re going to get it tied to the allocation of aid. Is there something else we can do?

We’re mission driven. Most of our mission statements say something about diversity. So if there’s some way for us to collectively move in that direction.

WM: Are you aware of the Oberlin, Kenyon—a number of the Ohio liberal arts schools—efforts to get rid of merit aid?

CBH: Yes. The Justice Department stomped on that, which was crazy because here were a group of schools trying to do exactly what the White House was trying to get colleges to do.

But there’s another player is this game. What if a foundation was willing to award a significant grant to any of the selective schools that wanted to move away from merit-based aid and toward need-based aid? So there would be a foundation creating an incentive toward collective action. Collective action in the absence of a third party would be a violation of anti-trust. But probably a foundation creating an incentive toward collective action wouldn’t.

WM: How would that work? Would a foundation create a grant for all the colleges?

CBH: Any school that went away from merit aid would get a grant that would help them transition. Most schools don’t want to do it even if they think they can afford it because other schools won’t. If this were an incentive for all schools to do it all at once, this might be a way to solve the issue.

You wouldn’t have to hold the schools equal in terms of their financial aid spending. It’s just that if only we do it we’re going to lose those high-SAT, upper-middle-class students. But if everyone does it, you won’t. They’ll be equally distributed.

Paul Glastris and Daniel Luzer

Paul Glastris and Daniel Luzer co-wrote this article. Glastris is the editor in chief of the Washington Monthly. Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly.