Alaska’s university leaders and public higher education advocates across the country have been in a frenzy ever since the state’s governor, Mike Dunleavy, recently proposed over $130 million in cuts (a 41 percent reduction in support) to the state’s higher education system. Though Alaska’s case is notably austere, many states have cut their higher education funding in recent years—particularly during economic slowdowns.
With college tuition on the minds of voters, and Congress deliberating reauthorization of the Higher Education Act, some federal policymakers are looking to incentivize increased state investment in higher education—to avoid situations like we are seeing in Alaska. One approach under consideration would reform the interaction between federal and state financing systems, with the aim of collaborating to limit tuition increases and better-promote affordability for students and families.
The federal government annually finances around $100 billion in federal student loans and spends $30 billion on grant aid to support low- and moderate-income students. These dollars flow directly to students and can be used at the institution of their choice. Meanwhile, states tend to finance their public higher education systems through direct appropriations, with many states also operating supplementary grant and loan programs.
Critics of the status quo contend that the easy money available from the federal government has provided states with the flexibility to disinvest in their higher education systems, thereby increasing reliance on tuition revenues and ballooning student debt. Indeed, state appropriations for higher education are on a long-term downward trend. In today’s dollars, annual per-student state support declined from $7,724 to $6,866 between 1992 and 2018, which led to growing reliance on tuition revenues to finance public higher education.
The fact is that state governments have competing priorities, such as Medicaid and K12 funding. Especially during economic downturns, which tend to coincide with rising enrollment levels in higher education as job prospects worsen, declining tax receipts force states to make tough choices about where to cut services. Under the current financing mix for higher education, however, states have less of an incentive to maintain such spending because they know the federal government is on the hook for plugging financing gaps through its sizable loan and grant programs.
An examination of the data from recent decades shows considerable fluctuation in year-to-year funding for higher education, driven largely by macroeconomic conditions. Between 2008 and 2013, during the throes of the Great Recession, real per-student appropriations dropped from $7,892 to $5,920, before rebounding after the recovery picked up steam.
Only looking at state appropriations fails to tell the complete story. Another important aspect is the level of funding that states have the capacity to invest in their higher education systems. When viewed through this lens (known as state tax effort), today’s state financing remains far below historical levels. Specifically, as a percentage of personal income, state funding has dropped from around 1 percent in the mid-1970s to less than 0.6 percent today.
Research shows that declining state support hurts affordability, especially for low- and middle-income students. Financial aid is insufficient for many students at public and private universities alike, which has contributed to swelling loan balances, with cumulative student loan debt reaching over $1.4 trillion.
In recent years, a number of organizations and lawmakers have recommended reforms to the federal-state financing relationship as a way to encourage state investment, better-target resources, and build institutional capacity.
This “federal-state partnership” could be designed as a targeted but flexible grant to states that incentivizes improvements in both outcomes and state behavior. For example, it could reward states that do particularly well in promoting affordability for students, or those that are efficient in degree production. This system could be made optional for states and include a state match for those that choose to participate.
Below are several key metrics that policymakers could consider in designing such a grant:
- State Population. To ensure proportional allocations, funding could be scaled to the population of the state, as larger populations require greater levels of resources. State population is likely a better metric than current postsecondary enrollment levels, given that a successful federal-state grant program could reduce tuition prices and thereby increase demand for higher education. The average income level in the state may be another metric for policymakers to consider, should they desire to provide greater assistance to states with fewer means to fund their own higher education systems.
- State Tax Effort. Several existing federal-state partnership proposals tie funding to current state appropriation levels, where states with lower appropriations would receive larger allocations, which has the perverse effect of rewarding states that have disinvested in their higher education systems. A more comprehensive approach could tie funding to the state tax effort, which looks at how much a given state invests relative to the size of its tax base. This would reward states that allocate a relatively higher proportion of revenues towards higher education, incentivizing increased state investment.
- Institutional Capacity. Given that institutional resources vary widely, funding could be partially targeted towards low-resource institutions within a given state. Additional funds could help promote capacity building at institutions to better support their students on the way to completion.
- Affordability. The federal grant could be partially allocated based on how well a state performs in promoting affordability for low- and middle-income students. Under this metric, states that have low out-of-pocket costs for students below a certain income threshold would receive higher levels of federal funding. This metric could also take into account the generosity of state need-based aid. If implemented correctly, this would provide states with an incentive to hold down prices for the neediest students.
- Productivity. A federal-state partnership could also consider how efficient a state is at degree production and tie the allocation formula to the number of degrees produced per student within a given state. This could incentivize states to focus efforts on moving students to graduation, which could improve both student outcomes and affordability.
Given that every state is unique and varies in its funding levels and approach to higher education, any proposal should provide a degree of flexibility for state governments to target these resources to best-serve the needs of their state. For example, states could have the option to invest these new funds in state appropriations, need-based aid, or other programs that target affordability for students and families. This type of flexibility, rather than a one-size-fits-all structure, could help to create buy-in among governors as well as help to ensure that funds are distributed efficiently.
Although higher education continues to be a sound investment on average for students, rising prices have made it increasingly inaccessible for too many Americans. The current situation in Alaska is clearly not a sustainable model for U.S. higher education funding. More broadly, austere cuts to public higher education will do little to promote improvements in access, affordability and outcomes. Design details will be important for both effectiveness and political feasibility, but a renewed federal-state financing relationship could realign incentives in a way that boosts state investment and promotes increased affordability for students. This is an idea that warrants bipartisan consideration as policymakers deliberate the Higher Education Act reauthorization.