What More Funding for State Universities Buys Students

Students on the campus of UCLA, 2017 (Lucy Nicholson/Reuters)
Hint: It isn’t lower tuition costs.

New research from the Federal Reserve Bank of Boston finds “strong evidence” that public universities raise tuition in response to state funding cuts. But as economists are loath to remind us, strong evidence is not the same thing as a strong effect. In fact, this latest research is more evidence that the effects of state-budget cuts on tuition are surprisingly weak.

The author of the Fed’s study finds that public colleges and universities increase net tuition and fees by $0.17 for every $1 cut to state appropriations. But some categories of public universities, including less-selective four-year schools and community colleges, “have few tuition changes after changes in state appropriations,” according to the study. If this weak relationship works in reverse, then state lawmakers who appropriate more money for universities should not expect even the majority of those funds to be passed on to students in the form of lower tuition. Instead, much of the money will allow universities to increase their own spending.

That is not necessarily a bad thing if more spending means higher-quality education and better student outcomes. But surveys show that high tuition is one of the major factors driving negative views of higher education among both Republicans and Democrats, suggesting that voters expect lower tuition in exchange for greater taxpayer contributions to public colleges. Unfortunately, in this case, voters are likely to be disappointed.

This latest evidence that state appropriations have little effect on tuition costs at public colleges hasn’t received much attention in the policy community. There is a pattern here. Many other studies reaching similar conclusions have also been largely ignored, an issue described in detail in this 2017 article from the Brookings Institution. Such studies are inconvenient for those who argue that state “disinvestment” in higher education is to blame for sharply rising tuition. More government funding, they say, will reverse the trend.

Speaking of a reversing trend, earlier this year the State Higher Education Executive Officers Association (SHEEO) reported that after cutting funding during the economic recession, state lawmakers have been increasing appropriations to higher education for the last five years. On a per-student basis, funding is up $1,117 over that time. If the disinvestment argument is accurate, tuition should have declined in the same period. But the SHEEO report shows that per-student tuition revenue actually increased by $839 despite the rise in state funding.

How can tuition rise even as state funding goes up? One theory holds that colleges and universities simply aim to maximize revenue, and thus spend almost all of the additional funds they raise, rather than returning the money to students by slashing tuition costs. Institutions have a pretty good idea of how much students and their families are willing to pay, and therefore charge similar rates of tuition regardless of whether state funding goes up or down.

In short, throwing taxpayer money at the problem has not had the intended effect. It never does.

— Jason Delisle is a resident fellow at the American Enterprise Institute (AEI). Preston Cooper is a research analyst at AEI.

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