The University of Pennsylvania has followed Harvard and a handful of other elite institutions by replacing student loans with finance-free aid packages for middle-income students, Penn announced yesterday.

Starting next fall, loans will be eliminated for undergraduates whose families earn up to $100,000. Those with higher incomes will get a 10 percent reduction in the amount they owe on their loans.

By 2009-10, Penn will unveil one of the most generous aid packages in the country by removing the income cap so all students who qualify will receive grants. The school decides financial eligibility on a case-by-case basis. Tuition and room and board at the Ivy League school are about $46,000.

Penn already has a no-loan policy for families earning less than $60,000.

"Even before we did the low-income initiative, we knew that middle-income families were facing a squeeze," said Penn President Amy Gutmann. "You begin with those with greatest need. But if you stop there, you're not doing everything you can do."

Many schools are under pressure to be more generous as their endowments soar from stock-market gains and federal financial aid lags behind rising school costs.

Last week, Swarthmore College announced it was replacing loans with grants a day after Harvard said it would charge students from families earning $120,000 to $180,000 just 10 percent of their income.

Gutmann said Penn's plan already was in the works last week when Harvard made its announcement. She said she met with the board of trustees' executive committee two weeks ago to ask it to endorse the plan, and with the full board at the end of last week.

"We weren't influenced by Harvard, but we're happy to be in excellent company," she said.

Unless they make less than $40,000, Penn families seeking grants will still have to contribute something toward tuition, and students will still be asked to work 10 to 15 hours a week.

A family earning $100,000 will have to pay $10,000 to $15,000 depending on their financial need, said Bill Schilling, Penn's director of financial aid. Those with incomes of $150,000 will be charged $20,000 to $25,000, he said.

Currently, 458 high-need students from families with incomes under $60,000 are receiving no-loan packages, Schilling said. The school expects 1,300 more to get the grants next year while 1,300 will get the 10 percent discount.

By 2009-10, virtually all of the 4,000 aided students will receive the finance-free packages. He said the formula for determining eligibility will remain the same.

Gutmann said that in two years the school doubled the number of poor students receiving financial aid and hopes to do the same with those from higher incomes. Penn will increase its financial aid to undergraduates by about $20 million, to $110 million, when the plan is fully implemented.

Funding will come in part from the school's mega-fund-raiser, the $3.5 billion "Making History" campaign, which is nearly half-funded after two years in its "quiet phase."

Without the campaign, the middle-class program would not be possible, said Gutmann. The school's endowment - $6.6 billion for fiscal 2007, a 20 percent increase the year before - is not big enough, she said.

As healthy as that fund is, it's no match for Harvard's $34.9 billion, largest in the country.

Schools have long supported the poorest students but are acknowledging that middle-income families are being priced out of top colleges. Many are experimenting with ways to help them, spurred in part of intense competition for the best students.

A 2004 Century Foundation study found that at 146 top colleges 74 percent of students came from the wealthiest families, 3 percent from the poorest and the rest from the middle.

"Clearly Harvard set off a mini-trend, partly because these universities are engaged in extreme competition for the best and brightest students," said Richard Kahlenberg, a senior fellow and expert in equality and education at the Century Foundation.

Amherst, Williams and Princeton have already substituted grants for loans to some students while other schools are coming up with creative affordability strategies. California Lutheran University recently announced that it will begin matching the public college tuition for students who are admitted to local state universities. Yale is expected to announce major changes to its aid policies in January, according to the National Association of Independent Colleges and Universities.

Not everyone thinks giving more to the middle class is a good idea.

Donald Heller, director of the Center for the Study of Higher Education at Pennsylvania State University, said schools "are addressing a problem that really isn't there," he said.

Middle-class families might complain about skyrocketing college costs, he said, but they can borrow money to pay for the tuition, or go to a less expensive school.

Poor students, however, are being priced out of higher education entirely, he said.

Schools like Harvard and Penn, which already give scholarships to low-income students, should use the money they set aside to fund middle-class students to increase the pool of qualified poor students, Heller said.

Gutmann said that thinking is wrong.

"It's absolutely necessary to create opportunities and level the playing field for middle-income students," she said. "It's not an either-or; it's both. To fulfill our commitment to opportunity, we must open our doors as wide as possible to low-income and middle-income students."

Contact staff writer Kathy Boccella at kboccella@phillynews or 610-313-8123.