No, Reduced State Subsidies Do Not Drive Tuition Increases

One of the great debates in higher-education policy is the relationship between cuts in state subsidies for colleges and universities and increases in tuition. Over the past two decades states (including Virginia) have curtailed state support, and college tuitions have soared. The higher-ed lobby argues that the one is the direct and proximate cause of the other: Institutions raise tuition to compensate for state cuts.

The national debate has played out here in Virginia. Last year, House of Delegates fiscal analyst Tony Maggio estimated that between 1996 and 2015, for every dollar the state cut in college subsidies, public Virginia institutions raised tuition by two dollars — implying that half the tuition increases could be attributed to the cuts. In March, Heywood Fralin, a member of the State Council of Higher Education for Virginia (SCHEV) contended that using a 2001 starting date for the analysis would have shown a dollar-for-dollar correlation between reductions in state support and higher tuition — in effect blaming the cuts for 100% of tuition increases. (See “Deciphering Higher Ed Statistics.”)

Against the backdrop of the same debate playing out nationally, Preston Cooper, an American Enterprise Institute scholar, has published research that reaches a remarkable conclusion: There is almost no correlation between changes in state funding and changes in tuition. State budget cuts account for maybe 5% of the tuition increases.

Proponents of the “state disinvestment” hypothesis blaming state cuts for tuition hikes are correct that smaller state subsidies among the 50 states has coincided with aggressive tuition increases nationally. Between 2004 and 2015, state subsidies per student fell by $1,319, or 15%, while average tuition increased $3,488, or 56%. But there is little causal relationship between the two trends, Cooper argues.

To the statistically untutored, those numbers might appear to suggest that roughly 38% of the tuition increase can be explained by state cuts. But such a superficial reading fails to explain why tuition rises both during periods of increasing subsidies and declining subsidies.

In his paper, “Pennies on the Dollar: The Surprisingly Weak Relationship between State Subsidies and College Tuition,” Cooper delves deeper than broad aggregate numbers. He examines year-to-year changes for hundreds of public universities across the country.

Citing the work of economist Howard Bowen, Cooper suggests that colleges do not seek to minimize costs like corporations do. They are not profit-maximizing institutions. (They are, I would suggest, prestige-maximizing institutions, which drives them to spend money on projects to enhance their rankings.) Colleges and universities, he contends, seek to maximize all available revenue streams and then benchmark their costs to the revenue they are able to raise. “An institution finds a way to use each dollar it accesses.”

Institutions charge all the tuition they can all the time. Whether direct subsidies go up or down is irrelevant. Subsidies and tuition are independent of one another; the pass-through rate is zero.

Cooper’s data indicate that Virginia’s public four-year colleges and universities actually have a slightly negative pass-through rate — 6.1%. “Negative pass-through,” he explains, “does not mean that institutions respond to subsidy cuts by reducing tuition outright but that institutions reduce tuition relative to its (sic) underlying trend when subsidies fall.”

Cooper theorizes that universities, reflecting their core mission of teaching, do try to avoid slashing instructional spending. Cutbacks fall most heavily on research and administrative costs.

Bowen … predicts that institutions will raise more revenue than they need to provide education and then channel the excess funds into superfluous expenditures that may be tangential to the core educational mission. When revenue streams contract, this low-value spending will be the first to go.

A corollary of Bowen’s theory, suggests Cooper, is that increasing state support for higher education will lead to trivial reductions in tuition. Colleges and universities will seek to maximize tuition revenue in any case. But more generous state subsidies will fund increased spending. Rather than increase direct support to institutions, he argues, states should consider abolishing subsidies and using the money to fund grant aid to students.

Bacon’s bottom line: I find Cooper’s theory intriguing, and I think it provides a useful frame of reference for examining trends in state subsidies and college tuition in Virginia. But I would like to see how the numbers play out before accepting his findings. In particular, his theory suggests that institutional spending would increase or decrease (with a year delay) in response to changes in state support. While the task might be tedious, it should be easy enough to look up the numbers. If I have time, I will do so and report back to readers.

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3 responses to “No, Reduced State Subsidies Do Not Drive Tuition Increases”

  1. TooManyTaxes Avatar

    One thing for sure, it’s a safe bet this study won’t get much play in the WaPo.

  2. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    The huge expansion of reimbursed cost of faculty research is likely a far bigger driver of escalating tuition costs at many selective institutions than the retrenchment of state subsidies. These exploding unreimbursed research costs that range from capital, hiring, regulatory, and administrative costs, take many forms. Most importantly, their risk profile is often very high.

  3. LarrytheG Avatar

    I think you could probably make this argument about ANY entity that receives DIRECT tax dollars to subsidize some product or service whether for-profit or non-profit.

    Further, I do not trust anything ANY agenda-driven think tank (left or right) produces unless it is replicated by other peer groups especially those without ideological or political agendas.. so whatever comes out of AEI or CEI or similar is presumed slanted until I see other non-partisan, non-ideological groups replicate it.

    Too much propaganda and ideological offal coming out of these groups these days.

    Subsidies that go to the customer/student (instead of the entity) WILL introduce customer choice . Just look at food stamps.. the recipients can maximize them by shopping at a Walmart rather than a local mom/pop store.. and they do…

    Just imagine what would happen if the subsidy went to Walmart of mom/pop to “help” lower income folks..

    If State support sent directly to the Student and only covered just the instructional and the student had to come up with the additional for the add-ons including room&board.. COMBINED with the College Scorecard – some level of competition would be introduced. …

    I’m actually surprised that AEI or CEI have not addressed this aspect .. but apparently they’re so busy pumping out agenda-driven propaganda.. it’s not
    a priority.

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