Episode 3

Shifting Public Support of Colleges and Universities 

We think of public universities as being set up to be accessible to all residents of their states.  Why, then, have their charges increased so dramatically?  We’ll answer this question on today’s episode.  I am Larry Bernstein and welcome to Charging U.

Public state universities have long been a source of pride to the citizens of their states.  They have been respected by rural, suburban, and urban residents for their high accessibility, low cost, quality education, success of their sports teams and research. This often transcends political affiliation, class, and geography.  

There has been a long history of support for public higher education in the United States.

At the urging of Thomas Jefferson, the Commonwealth of Virginia began funding the University of Virginia in 1818.  In 1855, Michigan established the first public agricultural college, the forerunner of what is today Michigan State University and the model for the land grant colleges.

The big national push to create public universities occurred in 1862 with the passing of the Morrill Act named after its Senate sponsor. The legislation has a very interesting past. Originally proposed in 1857 and passed by Congress, it was vetoed by President James Buchanan who, along with many southern lawmakers, thought that education was a state function, not a federal function.  So, after much of the opposition disappeared with secession of the southern states, the bill was re-introduced, passed by Congress, and signed by Abraham Lincoln.

The purpose of the Morrill Act was to create and endow at least one college in each state to teach “agriculture and the mechanic arts” hence the A and M in the names of some state colleges. It also was meant to teach other scientific, classical, and military studies but the main focus was to support practical skills for the working class and to aid farmers.

The federal government then gave each state 30,000 acres of public land for each senator and representative it had. For the most part, the land was taken from Native American tribes in the Midwest and California. There was no public land available in the East and parts of the South so states in those regions sold the land given to them in order to finance their new universities. Some states built new universities while others, such as Georgia, gave the money to the existing state supported university, The University of Georgia.  Other states such as New York financed public entities within already established private colleges such as Cornell.  

But in parts of the country where segregation existed, Black students could not gain entry to these public institutions so in 1890 the second Morrill Act established the system of public Black colleges.  North Carolina created what is now North Carolina A&T while Alabama chose the already operating Tuskegee as a land grant college.

Most of the original land grant colleges are now what are called flagship state universities. They include Texas A&M, University of Nebraska, University of Kentucky, and Purdue University.  They are large research driven institutions with selective admissions. Most states also have a system of smaller, regional public colleges and universities with less selective admissions. They concentrate more on the practical needs of their local communities and focus less on research. They also receive less state funding and spend less per student than the flagship universities.

Public universities were boosted by New Deal programs which supported the construction of buildings and funded military research.  Later, the G.I. Bill helped over 2 million returning WWII service men and women afford to attend college by paying for tuition and living expenses.  The returning GIs and, later, the increasing numbers of Black students, exceeded the capacity of existing colleges and universities.  The need was met by expansion of the public college system at both the level of flagship universities and regional colleges.

In the very early 1900s, Columbia was the largest university in the country with a total of 6,000 students.  It has not expanded much since then so that today it has 8,000 students while Arizona State University’s total on-campus enrollment is 10 times as great at over 80,000.  Today, about 70% of all students in higher education attend public institutions.

So why has tuition risen so quickly at public institutions of higher education? While the federal government helped establish the land grant colleges it has been up to the states to fund them and to continue to support them. Funding for higher education is the third largest outlay in most state budgets – behind K-12 education funding and Medicaid and just above spending on corrections. As pressure to fund these other areas increased, funding for higher education decreased.   State legislators know that public colleges can always raise tuition or force students to take out loans to make up for budget cuts but there is no other way for K-12 schools or prisons to get additional funds.  So when there is not enough money to go around to all areas, it is easiest to cut the higher education allocation.  In addition, there is less public support for the idea that higher education is a public good.  Many feel that those who will reap the benefits of higher education should pay for it themselves.  

State appropriations for public higher education tend to fall during economic downturns.  In general, states support the general operations of institutions, provide financial aid to state residents, and fund some research – mostly medical and agricultural. State support of higher education adjusted for inflation peaked in the year 2001 and declined precipitously during recessions in the 2000s.  In constant 2015 dollars, the average annual state support per FTE student was $7700 in 2001.  This went down to $4600 by 2012, a greater than $3000 per student drop.  It is slowly creeping higher again.  In inflation adjusted dollars, it has just surpassed 2008 levels but it still has not reached 2001 levels.

The federal government does provide some support to public institutions of higher education and that support has increased in recent years.  Federal aid goes mostly to individuals in the form of Pell grants to lower income students and tuition benefits to veterans rather than transfers of funds directly to colleges. The federal government also gives large sums to public institutions for research.  In the past, state support of public colleges and universities was double the amount of federal aid but with the drop in state support total federal aid is now almost as much as state aid. 

Even with increased federal aid and slow replenishment of state aid the total federal and state support in constant dollars is still below the level of two decades ago.  State and federal support together only provide on average a third of a college’s total revenue. 

So, much of the remaining two-thirds needed to operate a college has to be made up by increased charges for tuition and fees. This is what is felt by students and their families. They either need to come up with more money to pay higher tuition and fees or borrow more or do some of both.  The result is that between 2009 and 2019, the amount of revenues collected from tuition and fees per full-time-equivalent (FTE) student increased by almost $2,000 in constant 2020 dollars. If you add in the money schools receive from federal Pell grants, then the amount of revenue received from tuition is even higher.

While we talk about public universities as a monolith, there is quite a bit of variability. State government funding to higher education varies dramatically by state.  In 2022, New Hampshire and Arizona provided the lowest appropriations per FTE student at 4 year institutions: about $3400, while Illinois and Alaska at over $22,000 were six times more generous.  Here’s another example of variability between states:   In 2022-2023, Vermont had the highest average in-state public college tuition at $17,100. Florida had the lowest average sticker price across all its public institutions at $4600.  In 2020, the only states that funded more than 25% of their public higher education expenditures were California, Florida, Illinois, Mississippi, and Wyoming.  Think about those 5 states: California, Florida, Illinois, Mississippi, and Wyoming:  3 large states and 2 small states.  3 red states and 2 blue states. One west coast, 2 south, 1 midwest, and 1 Rocky Mountain state. There does not seem to be a political, size, demographic, or geographic commonality that these 5 states all share.  As was mentioned in the first episode, neither political party can claim the high ground on the issue of higher education funding.

Since state government appropriations support only a fraction of the cost of running a university, additional sources of money are needed.  The total revenue of a system comes from tuition and fees collected, state appropriations, federal aid, external research funding, donations and endowment income and income from dorms and other auxiliaries.  Again, there is a wide variation in the amount of revenue with which a public university may operate.  On the low end, the Florida system of public higher education is frugal and functions with an average total revenue per FTE student of $22,000 while Michigan’s revenue is $50,000 per student.

One common tactic larger state universities use to gain additional revenue is to increase the number of out-of-state and foreign students who pay higher tuition than in-state students thereby theoretically subsidizing in-state students. I say nonresidents theoretically subsidize in-state residents because colleges may be budgeted for all students paying in-state tuition so the extra revenue is “found money" - a windfall which the university can spend as it pleases.  This averages $145 million dollars per year at flagship state universities.  They do not need to use it to lower overall in state tuition and, in most cases, use only a fraction of it to do so.  This is one reason why it is so remarkable that Vermont’s in-state tuition is the highest is the country.  Nearly 80% of the students enrolled at the University of Vermont are from other states.  This is the highest rate in the country so you would think that their instate tuition would be relatively low.  Many other state universities such as the Universities of Colorado, Michigan, Mississippi, and Wisconsin have out-of-state enrollments above 40%.  A few states such as North Carolina have strict limits on the number of out-of-state residents it may accept.

Unfortunately, regional public colleges, which already get lower state funding than flagship universities, have much less ability to attract out-of-state students and the extra tuition dollars they bring.   Regional public colleges also have trouble recruiting affluent, full paying in-state high school graduates. This causes the regional colleges to be less able to lower tuition for all in-state students or provide more financial aid to less affluent ones.  In many cases, it is less expensive for a low income student to go to a large flagship university than a smaller regional university.

The recruitment of out-of-state residents may be controversial in that there is a trade off of decreased access for in-state students in exchange for lower costs and more services for those that do attend. But it may be a necessary long-term survival strategy for states with small populations or those that expect slow growth or even population loss.  They need students to maintain their enrollment numbers and if there are not enough high school graduates in their own state, they have to look elsewhere to fill the seats.  The tactic seems to be working since the percent of out-of-state residents enrolled in public universities’ first year class has increased 55% between 2002 and 2018 while in-state first years decreased 15%.  At the University of Colorado at Boulder, the total amount of revenue taken in from students not from Colorado is twice the amount taken in from in-state students.  

Foreign students are included in the number that are not considered in-state residents.  They are a large source of revenue at the University of Colorado as well as other public and private US universities.  In 2015, international students paid $9 billion in tuition and fees just to public universities, accounting for over a quarter of their total tuition revenue.  Public and private colleges in the United States would be hard pressed to function without the income from international students.

Initially, enrollment management consultants, who we introduced in the previous episode, were contracted by private universities only, but then some of the larger flagship state universities began adopting their methods.  Now, even some regional state colleges are doing the same. 

These public universities are using targeted aid and discounts to recruit and enroll in-state high school graduates with high academic credentials, those who can pay more, and out-of-state students who can help in both those areas.  They use their aid budget to present discounted packages to keep high academic achieving state residents, who often are affluent or financially comfortable, from going elsewhere.  This improves the college’s prestige, ranking, and financial status.   

A public college can also offer attractive packages to entice students to cross state lines. Those students pay at least part of the higher out-of-state tuition.  Let’s consider a hypothetical case.  Beloved State University has a tuition and room and board sticker price of $25,000 for in-state residents and $45,000 for out-of-state residents.  

Brady is an in-state resident with average high school grades and test scores and whose family income is $40,000 a year.  He may get a Pell Grant which covers $4,000 and also a need based discount of $10,000 a year.  The college will take in a total of $15,000 per year from Brady who still has to come up with $11,000 per year to pay Beloved State.  

Crystal is a state resident with high grades and standardized test scores and a family income of $95,000 per year.  The college can offer her a $3,000 discount and still collect $22,000 per year from her and her family.  The college takes in $7,000 more than it does from Brady.  

Ashley is not a resident of the state.  The college can present a $10,000 merit scholarship narrowing the difference in cost with her own state’s public university. She is flattered by the scholarship.   Even though the college is offering her the largest discount, it still collects $35,000 per year, more than from the other 2 hypothetical students.

Even though Beloved State University is a public college supported by the taxpayers of its state, for financial reasons, it may favor out of state Ashley over in state Crystal and for prestige reasons, Crystal over Brady.

Over the last 10-15 years, the amount of aid given by public colleges on a non-need basis has risen dramatically.  Between 2001 and  2017, at least 40% of the aid public universities provided went to students with low levels of financial need and the number is rising.  The University of Alabama gives out automatic non need based merit scholarships worth between $6,000 and $28,000 per year to out of state students based on their standardized test scores.  Georgia has initiated a merit scholarship program for instate residents to entice them to enroll at a public flagship university.  In both cases it has improved recruitment and the financial bottom line.  It has also improved rankings, which is a topic we will cover in an upcoming episode.

Since aid is shunted to other targeted groups, there is less aid available for the truly needy.  States that give large amounts of non-need based aid meet less of a student’s demonstrated need.  Demonstrated need is the difference between the total cost of a year at the college and the total amount of financial aid, expected student earnings, and expected family contribution.  Since this already takes into account the fact that the student is working, the only way to make up for this deficit is to work more hours than is considered appropriate for a full time student or to take out even larger loans.  More graduates in states that issue high amounts of non-need based aid are forced to take out loans and their average debt is over $5,000 more than in those states that maintain mostly need based aid, namely California, North Carolina, Texas, and Washington.  Again, try to come up with a political commonality between those 4 states.

The National College Attainment Network defines a college or university as being affordable if the total of expected family contributions, financial aid, and income from the student’s expected employment equals or exceeds the cost of attendance plus $300.  Only a quarter of public four year colleges or universities met the criteria for affordability.

Since an insufficient financial aid package is one of the single most important factors preventing students from completing their degrees, this is a tremendous blow to access and social mobility, especially, when one considers that this is being funded by the taxpayers of the state.  Dr. Raj Chetty, an economist at Harvard who does a lot of excellent research on college accessibilty, found that the share of low income students enrolled at public colleges decreased 4.6% in the first 15 years of this century.

We have looked at the history of public colleges and universities. We've seen how state support varies greatly between states but overall has declined significantly. Douglas Webber, now a senior economist at the Federal Reserve, estimated that, on average, since 2000, the annual cost of attending public colleges has risen $4,000 due to decreased state support.  Total federal support of public institutions, though increased, has not made up for the shortfall; therefore more of the cost has been transferred onto the shoulders of the students and their families in the form of higher tuition and fees.  Public universities are moving to adopt the high tuition, high aid model of private universities and their use of aid has been to favor strategically those that can pay more and improve the universities’ bottom line.

Various sources assign between one third and three quarters of the increased cost of public colleges to the decrease in state funding so that means at least a quarter and possibly a lot more of the increased tuition charges are due to other reasons.  The Wall Street Journal estimated that, “for every one dollar lost in state support, … the median [public college] increased tuition and fee revenue by nearly $2.40, more than covering the cuts.”  So, the Wall Street Journal estimates that only 40% of the increase in public college tuition is due to decreased state funding.  The other factors that have forced public colleges to raise tuition even more than the decrease in state appropriations are common to both private and public colleges.  We will be examining them in the upcoming episodes.  

Thank you for listening to Charging U.  In this episode, we learned that decreased state funding of higher education has shifted the burden of paying for college onto the students themselves but the decrease in funding only explains a portion of the rise in tuition.  In the next episode, we discuss the role loans, aid, and government policy play in increasing the cost of college.  

If you found Charging U informative, please leave a rating and review and definitely tell your friends to listen.  Feel free to contact me at larry@chargingupodcast.com with any comments.  Until next time, be well and be safe.