March 19 (Bloomberg) -- Davidson College said it will become the first national liberal arts school in the U.S. to follow the lead of Ivy League universities such as Harvard and Princeton by eliminating student loans from its financial-aid packages.

Davidson will help students with financial need pay costs by providing grants and jobs, starting in August. The shift will cost almost $2 million in the first year, the Davidson, North Carolina, school said today.

Universities previously began taking similar steps to attract more lower-income students and address criticism by members of Congress over the increasing cost of a college education. The move by Davidson, ranked 10th among national liberal arts colleges by U.S. News & World Report, may spur other schools to follow suit, education officials say.

``They're doing this with less financial resources than some of their peer institutions, and that's brave and bold,'' said David Warren, president of the Washington-based National Association of Independent Colleges and Universities. ``This will have a reverberating effect on Davidson's peers.''

The trend for colleges to eliminate student debt reflects a recognition about the changing demographics of future students, Warren said. He said research indicates that growing numbers of new college-age students will be minorities and from families below the poverty line over the next decade.

`National Priority'

``If aid is not increased, we put a significant portion of the future student population at risk,'' Warren said. ``This is a national priority question.'' The most recent available U.S. Education Department data shows that in the 2003-2004 academic year, students graduated on average with $19,700 in debt, he said.

About a third of the 1,700 students at Davidson's 450-acre campus north of Charlotte receive need-based aid. Liberal arts schools typically concentrate on undergraduate education rather than research.

Davidson's trustees expect the new policy to encourage lower-income students who might have dismissed the school as an option because they thought they couldn't afford it, said President Robert F. Vagt.

Tuition, fees and room and board for the current academic year total $38,784 at Davidson, which counts among its alumni former U.S. President Woodrow Wilson, former U.S. Secretary of State Dean Rusk and two North Carolina governors. President George W. Bush's press secretary Tony Snow and crime novelist Patricia Cornwell also are alumni.

``We knew we couldn't sit and ignore what has been going on,'' Vagt said in a telephone interview. ``We've hidden behind the notion that we can't afford to do this.''

Increasing Fund Raising

The college will pay for the new policy in the short term with operating reserves and donations, said Christopher Gruber, Davidson's dean of admissions and financial aid. The college will kick up its fundraising to help cover costs in the longer term.

If the proportion of students with financial need reaches 40 percent, as school officials expect, the cost of the no-loan policy would increase to $3.5 million a year. About $65 million in new endowment funding would be needed to generate the necessary income, Gruber said.

Davidson's endowment of $446 million last year comes to more than $250,000 per student, placing the school 59th among more than 1,000 U.S. higher-education institutions on that basis, according to the New York-based Council for Aid to Education. The endowment exceeded three Ivy League schools on a per-student basis -- the University of Pennsylvania, Cornell University and Columbia University.

Penn, Stanford

Penn, located in Philadelphia, and Stanford, near Palo Alto, California, said a year ago they would waive costs for students in particular income brackets to eliminate the need for loans. Harvard in Cambridge, Massachusetts, and Yale in New Haven, Connecticut, also have similar programs.

Columbia in New York said in September that it would provide enough aid, supplemented by part-time work in some cases, to eliminate the need to borrow.

Princeton Paves Way

Princeton University in New Jersey started the trend among Ivies in 2001 when it announced that all financial aid would consist of grants, not loans, regardless of parental income.

Princeton's endowment is currently valued at more than $14 billion, fifth largest in the U.S. It ranked third in 2006, with $1.9 million per student, behind Rockefeller University in New York and the University of Texas Anderson Cancer Center in Houston.

``If this encourages others to do the same who clearly have larger endowments than ours, it would be a significant second benefit,'' Davidson President Vagt said.

Swarthmore College outside Philadelphia has held loans constant in recent years. That school's endowment was $1.2 billion last June, almost three times the size of Davidson's, and ranked ninth in the U.S. on a per-student basis at more than $841,000 each, ahead of Stanford.

``I think it's great news,'' said James L. Bock, dean of admissions and financial aid at Swarthmore. Eliminating loans is ``always part of our discussion and thought process.''

James Kolesar, a spokesman at Williams College in western Massachusetts, said the school ``continually reviews its financial aid policies.''

``I can't say if we'll go to zero loans in any particular time frame,'' said Kolesar, whose school's endowment per student of more than $783,000 ranked 13th in the U.S. The total endowment was $1.6 billion at the end of June, more than three times Davidson's.

Hamilton College in upstate New York said last week that it was eliminating merit scholarships so it can reallocate about $1 million toward need-based aid.

Davidson, founded in 1837 by Presbyterian ministers, has 162 full-time faculty and an annual operating budget of $82 million. Vagt last year announced plans to step down at the end of the current semester. A search committee is reviewing candidates and expects to pick a new president before July 1.

To contact the reporter on this story: James O'Neill in New York at joneill6@bloomberg.net.

Last Updated: March 19, 2007 14:58 EDT