Late last year, Harvard University announced plans to replace all undergraduate loans with grants and to spend an additional $22 million annually to help low- and middle-income students. Starting in the 2008-2009 academic year, undergraduates from families earning between $120,000 and $180,000 annually will pay only 10 percent of their incomes in tuition.

The devil, as Ross Perot used to say, is in the details—and, in the words of an earlier Harvard grad, Henry Adams, the devil also may be in the unintended consequences. “I think it’s a great step in the right direction,” says Charlie Slack, an author in Connecticut who graduated from Harvard in 1983, “but people in income brackets just above that are facing a very steep tuition hill themselves, especially if they live in a high cost region,” such as the Northeast.

Education policy experts have been eyeing Harvard’s move cautiously, particularly since Yale and a handful of other schools have emulated it. Most agree this isn’t merely a wave of academic altruism; rather, it’s the latest development in a long-running battle between congressional watchdogs and the nonprofit sector. Harvard happens to be a tempting target for federal scrutiny since, as Slack notes, its overall endowment (nearly $35 billion) “is more than the GNP of a lot of countries."

Wealthy universities have felt continuing pressure from the Senate Finance Committee and its bipartisan leaders: Max Baucus, a Montana Democrat, and Charles Grassley, an Iowa Republican. Grassley praised Harvard’s December decision, calling it “big news” and predicting that it “could inspire other expensive colleges to make tuition more affordable.” After Yale announced plans to increase spending from its $22.5 billion endowment, the Iowa senator said he hoped it would accelerate the “discussion of whether to impose a mandatory endowment pay-out requirement on well-funded colleges."

The Senate Finance Committee has spent years tightening the screws on tax-exempt universities, charities, and other nonprofit groups. As a result, the Internal Revenue Service recently completed what it called “a significant overhaul” of the reporting form that tax-exempt organizations must file each year—the first major revision since 1979. Even as Grassley lauded Harvard, he praised the IRS for adopting stricter requirements for “more consistent transparency” among tax-exempt groups.

No wonder the nation’s vast nonprofit sector wants to avoid any whiff of impropriety. “Everyone wants to pay attention and not be a poster boy for bad actions,” says Thomas Silk, a senior counsel at Silk, Adler & Colvin in San Francisco and an expert in tax exemption law.

Yale is spending about 3.8 percent of its endowment this year, while Harvard is spending about 4.3 percent and plans to reach the 5 percent mark next year.

This protective stance is becoming commonplace for board members at nonprofits, who have experienced heightened federal scrutiny since the landmark Sarbanes-Oxley Act was passed in 2002. “What you see if you look at that [revised 990] is much tighter control around the issue of independent directors,” says Lynne L. Heinrich, a senior consultant at Marts & Lundy, the international philanthropy-consulting firm. “Organizations need to pay attention to this."

Harvard and Yale clearly are paying attention, as are a growing number of other top schools. Exactly how many is a matter of debate. “There’s a relatively narrow swath of U.S. institutions—arguably 100 to 150 endowments”—large enough to follow Harvard’s lead in boosting financial assistance, says Frederick M. Hess, director of education policy studies at the American Enterprise Institute. In late December, The New York Times reported that “a stampede of additional institutions—the University of Pennsylvania, Pomona, Swarthmore, Haverford—have taken the same step, which will help middle-and-upper income families."

Yale President Richard C. Levin told the Times that congressional pressure played a role in the university’s decision, along with “some concerns by some Yale donors about the university’s relatively low level of spending.” As Levin put it, “The folks in Washington are saying you’re hoarding money. And we felt uneasy about it ourselves."

Hess reckons that the uneasiness won’t trickle down to cash-starved local and regional universities or community colleges. Others aren’t so sure. Harvard and Yale set the pace for U.S. higher education, they say, so what’s good for the Ivy Leaguers must be good for local liberal arts colleges. “Private colleges in particular are going to be hassled by parents trying to negotiate a lower price,” says David W. Breneman, a professor of educational economics at the University of Virginia.

Parents looking for tuition relief should keep an eye on the Baucus/Grassley show in the Senate. Other tax-exempt groups, such as private foundations, face mandatory payout requirements of 5 percent per year. Universities do not—at least not yet. Annual endowment spending at U.S. colleges currently hovers just above 4 percent. Yale is spending about 3.8 percent of its endowment this year, while Harvard is spending about 4.3 percent and plans to reach the 5 percent mark next year, according to The New York Times.

“I’m all in favor of the notion that these guys with billion-dollar-plus endowments ought to be paying out 5 percent rather than hoarding resources,” Hess says, calling it a "perfectly reasonable thing" for Congress to require. But he warns that lawmakers should not go too far in the direction of regulating university spending. It would be better, Hess says, to let the schools decide for themselves how to spend their savings—some may choose to increase faculty pay or improve lab facilities—and trust that their own self-interest will guarantee that those savings have a positive long-term impact on educational quality and affordability.

Senator Grassley has stated his position bluntly: “Tax-exempt organizations are supposed to provide public benefit in exchange for their special status. Helping the next generation afford college is a public benefit.” After Yale’s announcement in mid-January, Grassley declared, “This isn’t just an issue of college access. It’s also an issue of tax fairness.” He cited the 5 percent payout requirement as a modest reform that Congress could implement.

Breneman agrees with Grassley that the 5 percent proposal would help drive down tuitions. “That’s more defensible than pushing aid up to higher and higher incomes, which isn’t good social policy,” he says. Given the buzz created by Harvard and Yale, it will be interesting to see if—or how soon—Congress will act.

Chip Jones is editor of new media at The Bergman Group in Richmond, Virginia.