Reforming How States Pay For College

Improving higher education needn’t cost more money than states already spend.

It has become commonplace to say states have been disinvesting for decades in their public colleges and universities. This perception has led to various proposals for reform, such as making public colleges tuition-free, that would require the federal government to provide tens of billions of dollars in new money every year to make the system more financially sustainable.

But spending more money is not the only answer nor is it the best one for meeting the challenges higher education faces. States and localities already spend more than $100 billion per year on higher education. I suggest that states can improve the affordability, efficiency, equity, and relevance of higher education without spending any more taxpayer funds than they already do.

Debunking the Notion of State Disinvestment

To begin with, the notion that states have been disinvesting in higher education is based on a misreading of the numbers. True, state and local funding for higher education peaked before the Great Recession, then dipped, but it has recovered since. In fact, in 2019 state and local governments for the first time spent more than $100 billion on higher education, the most ever in real terms. That level of support continued in 2020 despite the impact of COVID.

The real funding shortfall has been in the form of declines in spending per student, as enrollment growth has regularly exceeded public funding increases. Per student public support peaked in 2000 and fell by 25 percent after the Great Recession. It has grown since but has not fully recovered; per-student public funding was $8600 in 2020, a real drop of 14 percent since 2000. Many focus on this reduction as proof of state disinvestment.

But tuition increases have more than offset any drop in public appropriations. When tuition revenues net of aid are added to public funding, total educational resources available to public institutions were roughly $15,000 per FTE student in 2020, the highest level ever in real terms. These are among the highest resource levels for public higher education in the world. Moreover, looking only at government support for higher education is like a retail store chain bemoaning its loss of in-store sales while its online sales are soaring.

These trends have varied significantly among states, so my observations about national trends won’t accurately describe the situation in many states.

The Real Challenge Facing the States

To ensure a high degree of affordability and accessibility, states for most of our nation’s history provided enough taxpayer support to keep tuition at public institutions below 10 percent of what it cost to provide that education. But exploding growth in the number of people going to college has strained most states’ ability to keep up. One result is that students and their families today pay 50 percent or more of the cost of their public higher education. This five-fold increase in cost sharing is the basic challenge facing states today.

The challenge can be traced back to the early 1970s, when two national commissions argued that public-sector tuition should rise over time to one-third of costs to reflect more accurately the higher incomes earned by students who attend and graduate from public colleges and universities. This recommendation was not immediately adopted, but over time it has gained acceptance as the competition for state funds has become even more intense.

The one-third recommendation made sense. But inadvertently it has led state policy makers and others to view tuition as a primary means of financing public institutions rather than as a reasonable measure of what students and their families can afford to pay. Typically, a state’s funding process begins by considering what represents full funding of institutions and then to what extent it is possible to meet those needs. Funding for student aid tends to be a residual decision once most other funding decisions have been made. In other words, institutions get the bread and students get the crumbs.

One result is that tuition levels at public institutions have shot up over time — especially during recessions when tax revenues decline. At the same time, enrollments tend to increase during recessions as job opportunities dry up. Much of the decline in per student spending occurs as enrollment increases outpace the capability of states to fund higher education. For example, at least one-half of the decline in state funding per FTE student between 2008 to 2013 was a function of rapid recession-induced enrollment increases.

To some extent, however, the handwringing over the growth in the student share of costs has been overwrought. While the average student share of the has reached 50 percent, when out-of-state and international students who pay full freight are excluded from the calculation, the share of costs borne by state residents is closer to 40 percent. So a big part of the increase in the student share of costs has been borne by students who are not in-state residents.

Meeting the Challenge — The Need for Smarter State Policies

Nonetheless, it’s time to rethink state funding policies rather than simply throw more money at real problems. Another major problem with the existing policy process in most states is that funding decisions tend not to encourage key policy goals such as efficiency, equity, growth, and degree completion. That’s why states need to get smarter.

To start, they need to ask and answer questions such as: What are the state’s demographic trends — ages, incomes, jobs and so forth? How fast will demand for higher education grow over time, or will it decline if high school graduate numbers fall? How much of projected demand are public institutions capable of meeting? How strong is the private sector in the state? Is the education and training being provided relevant to the needs of the workplace?

With answers to those questions, state policy makers can then be guided by two key objectives: one is to make public higher education more affordable to all state residents. The other is to improve the relevance, efficiency, and equity in what public and private institutions within the state offer.

Making Public Colleges Affordable to All. A key objective for states should be to make public higher education more affordable, especially for those students whose families lack the resources for them to go to college. This is the rationale of those who want to eliminate tuition altogether. But states can accomplish the goal of greater affordability without spending any more money than they do now by adopting the following strategy:

States should tie tuition at public colleges to the average family’s ability to pay. States can do this be setting a range of tuition that public institutions can charge based on an agreed-upon share of state GDP per capita, and then allow institutions to decide what to charge their students within that range. Under this approach, institutions and programs in greatest demand could charge a higher percentage of GDP per capita than those not in high demand.

The key is for states to set realistic and reasonable limits on how high tuition can be set as a percent 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 ensure affordability for all, states must also provide sufficient funding for student grant aid to ensure that enough aid is available to cover the full cost of tuition and fees for students from families with below-average incomes and savings. (For this approach to work well, it would also be essential for the federal Pell Grant program to be amended to meet the non-tuition costs of attendance for students with limited family resources.)

This approach results in a certain symmetry. The more that institutions charge the less states will need to fund those institutions. But for those institutions charging near the top of the range, states would need to provide additional financial aid as there will be more students whose families lack the resources to pay. By contrast, for institutions that decide to set their charges at the lower end of the acceptable range, the state would be responsible to provide more institutional funding but less student aid. Carefully crafted, these policies could lower net state funding requirements as the reduction in institutional subsidies would more than offset necessary increases in financial aid.

Improving Relevance, Efficiency, and Equity. Beyond providing for greater affordability, to meet the challenges they face states must also develop policies that promote greater relevance, efficiency, and equity.

States should reallocate funds toward community colleges and other more vocationally-oriented programs, such as apprenticeships. In most states, institutions with the most resources tend to get more in state funding while those institutions that enroll more disadvantaged students get less. Shifting more state funds to vocationally-oriented programs would make the system more relevant to the needs of the workplace. It would also help unbend the higher education cost curve by states supporting institutions and programs that tend to spend less per student than most public four-year institutions.

Tuition should no longer be charged for remedial courses. The existing system for financing remediation is fundamentally flawed as students taking remedial courses typically are charged regular tuition and many must borrow to pay for these courses. It would be far better not to charge tuition to these students nor allow them to borrow for these courses.

To do this, states should join with the federal and local governments in moving to a performance-based system for students taking remedial courses. This could be accomplished if the various providers of remediation were paid based on how well they raise the basic skills of the students taking those below college-level courses. This change could be paid for through the sharp reduction in interest subsidies and defaults that would no longer be needed because students taking remedial courses would no longer be borrowing.

Assure that all qualified state residents have access to public higher education. This key objective can be met if states establish a full funding compact with all public institutions within the state. Under such compacts, public institutions would be assured of full funding enroll target numbers of state residents through a combination of state appropriations and tuition and fee revenues. Once those enrollment targets for state residents are met, institutions would then be free to decide how many non-residents to admit.

Encourage public institutions to grow beyond targeted enrollment levels. In most states, institutions must rely on tuition and fees to cover the marginal costs of any growth in enrollment beyond what was anticipated in state funding decisions. To encourage more growth, states could carve out a portion of the core grant and make it into a government-funded fee that is uncapped with regard to resident enrollments. Creation of a state-paid fee would mean state taxpayers would share in paying for this growth.

To increase efficiency, allocations to institutions should be based on normative costs. The funding systems in most states rely on institutional reports of how much they spent to allocate scarce funds. The problem is that colleges and universities tend to exaggerate what they spend per student in reporting to state governments. The higher education cost curve could be bent back if allocation formulas were based instead on what “ought” to be spent per student in different fields as determined by objective analysis of the data.

States should establish rainy day funds to insulate themselves from the effects of recessions. Recessions often represent a double blow to public institutions as tax funding tends to contract while enrollments tend to expand. One way to deal with this contingency is for states to establish rainy day funds to be utilized when funds for higher education tend to evaporate. A number of states have done this; more should do so.

States should pay institutions for the Pell Grant recipients they enroll and graduate. The funding process in most states tends to favor enrollment over completion. This is one reason that U.S. college completion rates tend to lag those in many other countries. This is also why the Biden administration has proposed a college completion fund in which institutions would receive grants from the federal government based on acceptance of their proposals.

But states have it within their power to improve completion rates simply by allocating a portion of their funds to this purpose. They could do this by using these funds to pay public and private institutions based on the number of state-resident Pell Grant recipients that they enroll, transfer and/or graduate. This would allow all institutions to figure out ways of making this happen; those who performed the best would receive more funds in the future.

The proposals described here, taken together, would not require more funding than the $100-billion-plus that states and localities currently spend to support higher education institutions and students. This truly is a better way for states to meet their objectives than relying on the federal government to spend tens of billions of dollars more every year.