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American Rescue Plan Lays the Groundwork for a Federal-State Partnership

The American Rescue Plan, signed into law last week, provides $40 billion in emergency funding for higher education to mitigate the pandemic’s effect on college and university finances and help campuses return to normal instruction. These resources will be distributed to institutions, and schools must use at least half to provide emergency aid to students facing financial insecurity as a result of COVID-19. Yet, more can be done to support students in the long term.

While there are reasonable objections to the bill’s generosity—particularly given that the Congressional Budget Office estimates colleges will continue to spend down these resources several years into the future—the legislation provides a blueprint for a federal-state partnership upon which policymakers should expand.

State funding for higher education tends to fall during recessions, and often fails to recover before the next crisis hits. The ARP provides additional federal support for education, but also implements a “maintenance of effort” provision requiring states to maintain existing funding levels in order to qualify for these new federal resources. This is similar to the federal-state partnership proposed by BPC’s Task Force on Higher Education Financing and Student Outcomes, which lays out a durable approach to ensuring consistent resources for higher education in order to promote student affordability and success.

Under BPC’s proposal, funding would flow to states as an annual block grant allocated based on measures of affordability, efficiency, and state tax effort. This would reward states with low net prices for low- and middle-income students, those that invest in higher education relative to their resource constraints, and states that demonstrate high rates of degree completion per $100,000 in institutional revenues. For every additional dollar a state invests in higher education over a three-year rolling average, the federal government would provide $4 in matching funds. The matching funds can be used to reduce unmet student need and improve outcomes for low- and middle-income students, but states would retain a high degree of flexibility on how to achieve these goals. One option would be providing additional investment in College Promise programs, which reduce or eliminate tuition for students. Finally, in order to account for the countercyclical nature of higher education funding, states would be required to set aside a portion of their federal grant into a rainy day fund that can be drawn upon in the event of an economic downturn.

While there are many federal-state models to consider—including a bipartisan bill introduced in the 116th Congress—a permanent financing relationship between the two levels of government would ultimately reduce the need for Congress to govern by crisis. We urge policymakers to work across the aisle to develop a sustainable and data-driven approach to higher education policy that provides consistent investment and supports underserved students.

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