Is there a tool in MS Word for setting reading level (8th grade, etc)?
There's nothing in Word that can _set_ the reading level. There is a
tool that's supposed to _measure_ the reading level on the
Flesch-Kincaid scale, although I don't know quite how trustworthy it
is.
In Word 2003 and earlier, go to Tools > Options > Spelling & Grammar;
in Word 2007, go to Office button > Word Options > Proofing. In either
case, check the box for "Show readability statistics".
When you check spelling manually by pressing F7, after the check is
complete you'll see a dialog box with statistics, one of which is the
Flesch-Kincaid Grade Level.