Changes in the U.S. labor market have made a college degree more important than ever for achieving a middle-class standard of living and for creating the possibility of life-long financial security. But the price of attaining a college education has risen dramatically in recent years. Moreover, fewer than half of first-time, full-time college students graduate within four years some never receive their degrees at all. For these reasons, pursuing a post-secondary education poses a poor value proposition for millions of young Americans.
Concern about rapidly rising tuition and relatively poor student outcomes, particularly among students from low-income and minority backgrounds, is prompting a vigorous policy debate about how to keep college affordable while also improving graduation rates. This paper addresses both parts of that debate by (1) examining recent trends in state support, tuition revenue, and institutional spending at public colleges and universities; and (2) reviewing recent state efforts to improve the performance of these institutions by linking a portion of the public funding that they receive to student outcomes.
Changes in the U.S. labor market have made a college degree more important than ever for achieving a middle-class standard of living
Specifically, Part I focuses on supply-side factors that may contribute to the ballooning prices at four-year public colleges and universities over the past decade and a half. Since 2000, annual tuition and fees at these institutions have nearly doubled, on average, from around $4,900 to $9,700 in inflation-adjusted terms. Meanwhile, the average annual cost of attendance including room and board as well as tuition and fees increased by approximately 70 percent in real terms, from around $11,800 in 2000 to $20,100 in 2015.
To better understand the drivers behind these trends, we present data on year-to-year changes in state funding for post-secondary education and track corresponding changes in tuition revenue and institutional expenditures. Our analysis is particularly useful for examining the relationship between costs at these public institutions and their state funding. Due to a combination of rising enrollment and state budget constraints, state support declined on a per-student basis in the years during and immediately after the Great Recession and only recently began to rebound. In addition, we provide a brief review of the evidence for faculty wages as a potential source of rising college costs.
Part II of this paper discusses recent efforts by several states to improve educational outcomes at public institutions of higher education. Specifically, we examine the introduction of performance-based funding mechanisms that seek to tie state funding for particular institutions to outcome measures typically the number of students who graduate. Although more time is needed to gauge the effectiveness of these funding mechanisms, some advantages and pitfalls of different approaches are already apparent. Of particular concern is the potential for unintended impacts on academic standards and on access to educational opportunities among low-income and minority populations. The paper concludes with case studies of the performance funding systems that have been introduced in Tennessee and Texas, including an analysis of which features seem to offer the most promise for addressing issues of educational efficiency, equity, and quality.
 The bulk of our analysis does not include private colleges and universities, which are not directly affected by changes in state support or by state efforts to introduce performance incentives through public funding mechanisms. As context, more than three-quarters (76.4 percent) of the roughly 17.5 million undergraduate students enrolled in a degree-granting post-secondary institution in 2013 were attending a public two-year or four-year college or university. Of these, roughly half were enrolled in a public four-year institution and half were enrolled in a public two-year institution. In addition, when discussing institutional revenue and state investment, this paper focuses on all public institutions, two-year and four-year. (The State Higher Education Executive Officers Association data does not disaggregate two- and four-year institutions.) Conversely, when the paper discusses the rising cost of attendance and institutional spending trends, it limits the analysis to public four-year institutions.