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Commentary By Preston Cooper

State Budget Cuts Don't Explain Tuition Increases

Economics Employment

A new conventional wisdom has emerged that state funding cuts are the main factor behind increases in college tuition. So argues economics professor Doug Webber of Temple University in a recent column at FiveThirtyEight. The logic makes sense on its surface: when universities see their state appropriations decline, they must raise tuition to cover the shortfall. But there are several problems with this argument.

For starters, it ignores the tuition increase at private universities. Since 2000, the net cost of attendance at a public four-year university has risen $5,610, according to the College Board. But the same figure for private nonprofit four-year universities is comparable, at $5,190. Private universities do not receive direct state appropriations, and so their tuition should be mostly unaffected by budget cuts. Since both the public and private sectors have experienced large price increases, this suggests that systemic factors are driving the increase.

The most likely culprit is the growing availability of indirect subsidies through federal student aid programs. Pell Grants and subsidized student loans enable students to pay more for college, so it is unsurprising that schools—both public and private—have raised tuition or cut back on institutional financial aid to take advantage of the largesse.

Webber concedes that this may be the case for for-profit colleges, and indeed there is quite a bit of evidence for that. But he does not entertain the idea that public colleges could be susceptible to this as well. Instead, he argues that cuts in state appropriations account for three-quarters of the increase in public college tuition since 2000. To arrive at this number, he assumes that schools raise tuition by one dollar for every dollar reduction in per-student state appropriations. This assumption is questionable to say the least.

If budget cuts really explained 75% of tuition increases, we would expect to see a strong association between changes in state appropriations and changes in tuition. In other words, schools which experienced deeper cuts should raise tuition more and vice versa. Below I have plotted the per-student change in state appropriations at 537 four-year public institutions against each institution’s change in tuition revenue from 2006 to 2013, a period during which many states tightened their belts to deal with the Great Recession.

This is, of course, just a correlation. But if the relationship between state budgets and tuition were really as strong as Webber suggests, it would certainly show up here. Instead, on a per-student basis, a one-dollar reduction in state appropriations is associated with just a 2.3 cent increase in tuition revenue. The association is significant (i.e., likely not due to statistical noise), so we cannot rule out that budget cuts have an effect on tuition. But are they the primary factor, or even a major one? Not even close.

Other economic evidence bears this out. An analysis by Michael Rizzo and Ronald Ehrenberg of the Cornell Higher Education Research Institute found that a 10% increase in state appropriations is associated with just a 1.8% reduction in in-state tuition. Another study by Marvin Titus, Sean Simone, and Anubha Gupta found that state appropriations influence tuition in the short term, but the relationship was far from one-to-one. There is also no evidence that there is any association in the long run.

This is admittedly counterintuitive. One explanation is the “revenue theory of costs,” first put forward by economist Howard Bowen in 1980. The theory holds that universities are unique in that they cannot easily measure unit costs, and so must benchmark their expenses to the available revenues. A university can theoretically spend unlimited amounts of money in the name of “education,” and so each dollar it gains access to it will find a way to use. This explains why federal student aid drives tuition increases: Uncle Sam makes funds available, and colleges spend them.

Webber rightly critiques those who blame “fancy dorms” and “administrative bloat” for the rise in the cost of college. Bloat is not the cause of tuition increases, it is the result.  Paying college presidents seven-figure salaries, maintaining a Division I football team, hiring scores of new administrators with silly job titles, and offering unnecessary courses are all “educational” expenditures to which universities can—and do—apply the funds that become available to them.

The reverse also holds. When universities face reductions in available revenues, such as cuts in state appropriations, they will find ways to reduce spending (though they may not be happy about it). This is why cuts in state appropriations do not tend to cause one-to-one increases in tuition. There may be a small tuition increase in the short term, but in the long term institutions will adjust to the new normal.

Ultimately, Webber’s assumption that states increase tuition by one dollar for every one-dollar cut in appropriations falls flat. As such, states should be wary of proposals to increase their higher education budgets as a means of ameliorating tuition increases. The evidence suggests states may have to increase per-student funding by five or ten dollars just to manage a one-dollar reduction in tuition, if that. To fight tuition inflation, policymakers must look elsewhere.

This column originally appeared on Forbes.

Preston Cooper is a policy analyst at the Manhattan Institute. You can follow him on Twitter here.

 

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