Adopting Smarter State Policies for Higher Education

The growing number of calls for making college tuition-free have been fueled by a widespread belief that states have been dis-investing in public higher education for many decades. This belief in state disinvestment has also led to an increasing number of proposals for a federal program that would augment state funding under certain conditions such as their keeping tuition low. But there are several reasons to question the assertion of disinvestment, including that the robust growth in public higher education since the end of World War II would have been impossible without sustained levels of state funding. For now, the much more important issue going forward in my view is to examine how existing funding levels can be spent more effectively to meet the very real challenges that the sector faces.

The recent release of the State Higher Education Finance (SHEF) 2018 report has unleashed a new round of debate about state disinvestment. Lost in this disinvestment debate, however, is the underlying reality that states already spend a lot of money in support of higher education. According to the SHEF report, states collectively in 2018 spent $85 billion in support of public higher education including student aid but net of research support. When combined with local government funding of roughly $10 billion per year, that means total state and local support of public higher education in 2018 was nearly $100 billion — 20 percent more in real terms than what was spent a quarter century ago. When tuition revenues net of discounts of $75 billion are added to the mix, total educational resources available to public institutions were $170 billion in 2018, roughly $15,000 per full time equivalent student. These are among the highest funding levels for public higher education in the world.

It is also the case that most states over time have tended to focus their higher education funding more on meeting the financial needs of institutions than the needs of students. Typically, a state’s funding process will begin by considering what represents full funding of institutions and then to what extent it is possible to meet those needs. State funding of student aid tends to be a residual decision once most other funding decisions have been made. One result is that tuition at public institutions has shot up over time especially when state funds are curtailed during recessions and student aid gets short shrift in the funding process. Another reality is that enrollments in public institutions increase the fastest during recessions especially at community colleges and graduate programs as job market opportunities dry up. This helps to explain why state funding per student in real terms declines during recessions as the boom in enrollments generally outpaces the capability of states to fund higher education.

Another major problem with the funding processes in most states is that they tend not to encourage the key goals of efficiency, equity, growth, and degree completion. Most state funds are directed to the institutions that have the most resources, meeting the needs of disadvantaged students are typically not emphasized, states often are reluctant to share in the funding of enrollment growth relying instead on tuition to pay for growth, and enrollment is traditionally favored over completion in the funding process.

The Need for Smarter State Policies. What is urgently needed are smarter state policies that utilize the already high levels of public investment in public higher education to meet the very real challenges that face the sector, including: exploding college charges; over reliance on loans; under-investment in vocationally-oriented programs; chronic equity gaps in participation, completion, and attainment; and concerns about quality and relevance including modest degree completion rates.

The first step toward smarter policies is for states to take a realistic assessment of their situation, including: what are the demographics within the state? Is demand for higher education likely to grow over time or is the number of graduating high school students falling? How strong is the private sector in the state? How much of projected demand are public institutions capable of providing? What is the quality and relevance of what currently is being provided according to objective measures?

The second step in developing a smarter strategy is to revise existing policies so that they are capable to meet pressing challenges. Those revisions should take two directions. One is for states to make public higher education more affordable to a broad range of their citizens, by becoming more cognizant of the needs of students and families, especially those who lack the resources to go to college without financial help. The second is for states to revise how they allocate funds to public institutions to place greater emphasis on meeting the goals of making public higher education more efficient and equitable.

In terms of making public higher education more affordable, public tuition should be tied to the average family’s ability to pay as measured by a share of the state GDP per capita. For this to work, states should set these shares within a range and institutions would decide what share to charge their students. The expected result is that tuition will vary by institution and program, with those of greatest demand and highest quality charging a higher percentage of GDP per capita than other institutions. At the same time, states must provide sufficient funding for student aid to ensure that enough aid is available to cover the full tuition costs for students from families with below average incomes.

These two policies, taken together, have a symmetry that would produce much better results. The higher that institutions set their tuition as a percentage of GDP per capita, the less that states will need to provide to cover the full costs of providing the education at that institution. But the states would also need to provide additional financial aid to the students at that institution as there will be more students whose families lack the resources to pay those higher charges. For those institutions that decide to charge tuition at the lower end of the acceptable range, the states would need to provide more funding to the institution but the amount of state student aid funding required would be less. Together, these two policies would lower the net state funding requirements. The trick is for states to set realistic and reasonable limits on how high tuition could be set as a percentage of GDP per capita and to ‘claw back’ a portion of the tuition collected above the base so that incentives to raise prices are reduced.

To make sure that all students are college or career ready, states should reallocate funds toward community colleges and other more vocationally-oriented programs such as apprenticeships. This shift in funding allocations would also recognize that the most direct and effective way for states to help unbend the higher education cost curve is to reallocate funds to those institutions and programs that tend to spend less per student than most public four-year institutions.

In addition, states should be willing to join the federal government in moving to a performance-based system for students taking remedial courses. Students would not be charged tuition and not be allowed borrow to pay for these courses. Instead, the various providers of remediation would be paid based on how well they raise the basic skills of the students taking these below college-level courses.

To help assure that all qualified state residents have access to public higher education, states should establish a full funding compact with all public institutions within the state. Under these contracts, public institutions that enroll target numbers of state residents would be assured of full funding through a combination of state funding and tuition and fee revenues. As long as these enrollment targets for state residents are met, institutional officials could then decide how many non-residents to admit.

To encourage public institutions to grow beyond targeted enrollment levels, states should carve out a portion of the core grant and make it into a state-funded fee that is uncapped with regard to resident enrollments. Around the world, there is a question about whether governments are willing to help fund growth in enrollments or to rely solely on student-paid fees to cover the marginal costs of growth. Creation of a government-paid fee would mean that states would share in paying for this growth.

To encourage greater efficiency, states should allocate funds to institutions based on normative costs — what “ought” to be spent per student in different fields — rather than the current funding systems in most states which rely on institutional reports of how much they actually spent. One problem with the existing mechanisms is that institutions tend to exaggerate what they spend per student in reporting to state governments. In a number of countries around the world, using normative costs in their funding processes is how they deal with this possible discrepancy between actual and estimated spending.

To reduce the effect of cyclicality of state funding, states should establish rainy day funds to insulate against the effects of recessions. It is demonstrable that state funds for higher education tend to evaporate during recessions. To deal with this reality, states should set aside funds when times are good that could then be used to bolster funding when the economy turns sour.

To improve degree completion rates, states should allocate some of their funds based on the number of degree recipients rather than enrollments. To improve the completion rates among disadvantaged students, states should allocate funds that pay public and private institutions based on the number of state-resident, Pell Grant recipients they enroll, transfer and/or graduate.

The proposals described above taken together would not require more funding than the $85 billion that states currently spend to support public higher education institutions and students. The more that institutions charge for tuition as a share of GDP per capita, the less the states would need to pay to institutions but the more that must be allocated for student financial aid. The net reduction in state funding requirements could be used to produce more state funds for community colleges and apprenticeships as well as reallocating among four-year institutions within existing funding levels.

In sum, getting states on the right track with regard to funding education beyond the secondary level does not require radical suggestions such as making public colleges and universities tuition-free which would only worsen the inequities that already exist. But it does require states to be much smarter in allocating the funds they already spend on public higher education to meet key challenges such as slowing or reversing the growth in tuition, reducing reliance on loans, closing chronic equity gaps, and raising degree completion rates.

Arthur M. Hauptman is an independent public policy consultant specializing in higher education finance issues. He can be reached at Art.hauptman@yahoo.com

Art Hauptman has been a public policy consultant specializing in domestic and international higher ed finance issues for nearly a half century.

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