A Conceptual Analysis of State Support for Higher Education: Appropriations Versus Need-Based Financial Aid

In this paper, we use economic concepts to examine the choice that states make between giving appropriations to public colleges or need-based financial aid to students. We begin by reviewing the economic justification for state support for higher education. Next, we introduce a simple economic model for comparing and contrasting appropriations and need-based aid for supporting higher education. We then provide a graphical depiction of the model and simulate the effects of each policy on access to higher education. We show that it is in the best interest of states to provide need-based aid and not appropriations. Finally, we conclude with a discussion of the factors that complicate the reallocation of state funding away from appropriations and towards need-based aid.

Some states invest relatively heavily in financial aid programs that benefit lower-income citizens, while other states concentrate their investment in programs that benefit students from higher-income backgrounds. States also vary in their levels of direct appropriations to campuses, a form of public subsidy that has long been viewed as benefitting middle-income citizens. What factors influence states to allocate higher education subsidies in a more or a less redistributive manner? This article reports on a study that examined sources of variation in state spending on need-based aid, merit-based aid, and appropriations over the period 1990–2010. Findings document relationships among spending patterns and structural and political conditions of states, indicating a “trade-off” between spending on merit- and need-based aid; as states invest more in the former, they reduce spending on the latter. We also show that the presence of a Republican governor and the strength of Republican representation in statehouses each is associated with increased state spending on need-based financial aid. Our results further show that increased wealth is positively associated with state spending on merit-based financial aid programs and state appropriations for higher education, but not need-based financial aid. We also find distinctive patterns of state support for higher education depending on the degree of centralization of a state’s governance arrangement for higher education; namely, the presence of a highly centralized structure is associated with decreased spending on merit-based aid programs and increased state appropriations to colleges and universities.

Higher Education Plays a critical role in supporting macroeconomic growth and, for individual students, represents a gateway to future economic success. Higher education also exerts significant influence on a regional and local basis, in terms of both economic and civic development. For example, the quality of a region's higher education institutions and the proportion of college graduates in the population appear to be important determinants of per capita income growth.1 Research spillovers from universities are also somewhat geographically localized.2 The status of the nation's overall higher education system and local higher education institutions is thus of crucial importance to major urban areas. In the United States, state governments historically have taken the lead in financing higher education. But over the past twenty years, state government support for higher education has gradually waned, and the share of higher education expenditures subsidized by state appropriations has declined. One result of declining state support has been the widely publicized rise in tuition at public [End Page 99] institutions.3 However, there is a second result, which is less well recognized, namely a widening gap in expenditures per student and in average faculty salaries between public and private institutions. The relative decline in spending per student at public universities appears to be exerting an adverse effect on the quality of faculty, students, and education delivered at such institutions. Since roughly three-quarters of college students are enrolled at public institutions, any decline in the relative quality of the nation's public universities could have significant implications. In this paper, we examine interactions between state appropriations for higher education and other state budget items (especially Medicaid) and the business cycle. We document the substantial decline in state support for higher education over the past two decades, explore the business cycle's effects on higher education subsidies, and compare the cyclical patterns in higher education spending with the cyclical patterns in other types of spending. We also examine the relationship between the Medicaid program and state higher education spending. In addition, we look at how declining state appropriations for higher education affect the relative quality of public higher education institutions. State Support for Higher Education The decline in state support for higher education over the past several decades manifests itself in several common measures.4 Figure 1, which shows state appropriations for higher education relative to personal income,5 demonstrates state appropriations have fallen from an average of roughly $8.50 per $1,000 in personal income in 1977, to an average of $6.80 in 2003. Since personal income amounted to $9 trillion in 2003, state appropriations would have been about $15 billion higher in 2003 if appropriations had been maintained at the ratio to personal income that existed in 1977.6 [End Page 100] Click for larger view Figure 1 State Appropriations for Higher Education per $1,000 of Personal Income, 1977–03 On a real per capita basis, state appropriations rose rapidly in the mid- to late 1980s and then fell sharply in the early 1990s.7 Beginning in the mid-1990s, higher education appropriations rebounded, but only sluggishly. In the late 1990s the rise in state appropriations accelerated, so that by 2001 state appropriations returned to approximately their level in the late 1980s. Note, however, that the 1990s recovery appears quite different from the 1980s [End Page 101] recovery. Appropriations were slower to recover during the 1990s and never exceeded their previous peak. Since 2001, appropriations have declined sharply again, repeating the earlier business-cycle patterns. The same basic pattern holds with regard to appropriations per full-time equivalent student (see figure 2). Click for larger view Figure 2 State Appropriations for Higher Education per Capita and Student, 1977–03 State appropriations also declined... collapse You are not currently authenticated. If you would like to authenticate using a different subscribed institution or have your own login and password to Project MUSE Authenticate

In this chapter, we explore the economic justifications for the role of government in supporting postsecondary education. Although many refer to education (particularly public education) as a public good, the teaching function of colleges and universities does not meet the economists’ definition of a public good. Perhaps the only product from postsecondary education that may be thought of as a public good is basic research. Instead, the economic rationale for governmental financial support of postsecondary education rests on the argument that students produce positive externalities when they go to college. We will outline the main economic concepts behind public goods and externalities, and show how they relate to governmental support for higher education. We also provide an extension of the model of public choice, and consider two higher education policy issues with regard to the appropriate level of state support for higher education and the debate between need-based and merit-based financial aid.

In attempting to explain state support of public higher education, this study develops a theory-driven, comprehensive conceptualization of the state political system within a larger theoretical framework that consists of state economic and demographic factors and higher education system attributes. Furthermore, although the higher education policy and finance literature has largely ignored the impact of interest groups on state policy and state support of higher education, they play a central role in the model presented here. The inclusion of politics in the explanatory model results in a more robust and pragmatically useful model.

The ultimate goal of this chapter is to provide future researchers interested in predicting and explaining state support of higher education with the tools they need to advance the field’s understanding of this important topic. In so doing, this chapter analyzes the various data sources and measures of state funding of higher education; reviews and synthesizes relevant theories which, when properly utilized, will help scholars understand the factors impacting state funding of higher education; reviews the relevant research; discusses several specific factors that ought to be consider when explaining state support of higher education; and reviews recent data and methodological advancements in this area of scholarship. The chapter concludes with a discussion of possible future directions for research in the area of state support of higher education.

State governments and public colleges and universities have a symbiotic relationship. Public higher education institutions play an important role in creating an educated citizenry and improving state and local economies, while states bear the primary responsibility of funding postsecondary education. Still, there is widespread evidence that the state-university relationship is eroding, as seen by the drastic cuts in appropriations for higher education during the past two and a half decades. Adjusted to account for inflation, state appropriations for higher education have declined 40% since 1978, and current state investment effort per personal income dropped $32.1 billion below that of 1980 (Mortenson, 2004). There are many factors that explain the nationwide decline in state support for public colleges and universities, but the majority of the blame rests on painful economic recessions that have occurred in the last 25 years. Recessions in FY1980-83 and FY1990-94 contributed heavily to the slide in support for higher education. The cuts during FY1990-91 were especially formidable, marking the first time in 33 years that state budgets allotted less money to higher education than the previous year (Schuh, 1993). The freefall in support for higher education only intensified as state appropriations were slashed $650 per student between FY2001 and FY2004, a period marked by widespread fiscal crisis among states (Jenny & Arbak, 2004). In addition to these economic hardships, drops in state support for discretionary programs such as higher education have also been attributed to a conservative shift in the federal government's role. During the last 25 years, the federal government transferred partial or full responsibility for many programs to the state and local level. This shift in philosophy, known as new federalism, resulted in steep cuts in federal and state aid for municipal and county governments (Peterson, 1995). Not surprisingly, this shift resulted in a significant squeeze in higher education appropriations for most states. The funding pinch occurred because public universities are forced to compete more intensely for dollars with other state programs such as Medicaid, K-12 schools, social services, and corrections (Schuh, 1993). Medicaid is forecasted to put an especially intense squeeze on higher education funding in the next decade as a larger share of public funds will be required to support the aging population of Baby Boomers (Kane, Orszag, & Gunter, 2003). Due to these economic and political factors, the relationship between states and public higher education is fundamentally changing across the country. This change is especially noticeable at major public research universities that are increasingly becoming quasi-private institutions. For example, state support accounted for approximately 35% of the budget at the University of Wisconsin-Madison in 1988, as opposed to 21% of its budget in 2004 (University of Wisconsin-Madison Office of Budget, Planning, and Analysis, 2004). As at many other research universities, rising tuition and support have picked up the budget shortfall at the Madison campus. Fundraising especially is emerging as a high priority for colleges and universities, including UW-Madison, which is en route to completing a $1.5 billion campaign (University of Wisconsin Foundation, 2003). This shift toward an increasingly private public research university been accompanied by an increasing tension between higher education administrators and state legislators. Mark Yudof, President of the University of Texas System, bemoaned the fact that the compact that once governed states and public research universities has withered, leaving public research universities in a purgatory of insufficient resources and declining competitiveness (Yudof, 2002, p. B24). Other public research university presidents have echoed Yudof's concerns, saying that further state cuts will radically change the character of their institutions (Gose, 2002). …

This research examines state support for higher education by first ascertaining the amount supplied and demanded of this service. The approach assumes that supply and demand occur simultaneously, and that each is affected by higher education spending policies among the states. We argue that enrollment is the most satisfactory proxy for both supply and demand. State policy is measured as expenditure effort. We estimate three time‐series equations using two‐stage least squares regression with data for the years 1986–95. In the final equation, supply/demand (enrollment) emerges as the strongest predictor of state spending effort. Commitment to higher education (effort) is also especially sensitive to variations in the number of employees (per student). Employee costs clearly are a major factor in fueling increases in state higher education spending effort. State per capita income exerts a negative effect on the final dependent variable. Poor states exert greater financial effort in support of their colleges and universities than do more affluent states.

In the wake of declining state support for higher education, many state leaders have adopted lottery earmark policies, which designate lottery revenue to higher education budgets as an alternative funding mechanism. However, despite the ubiquity of lottery earmarks for higher education, it remains unclear whether this new source of revenue serves to supplement or supplant state funding for higher education. In this paper, we use a difference-in-differences design for the years 1990–2009 to estimate the impact on state appropriations and state financial aid levels of designating lottery earmark funding to higher education. Main findings indicate that lottery earmark policies are associated with a 5 percent increase in higher education appropriations, and a 135 percent increase in merit-based financial aid. However, lottery earmarks are also associated with a decrease in need-based financial aid of approximately 12 percent. These findings have serious distributional implications that should be considered when state lawmakers adopt lottery earmark policies for higher education.

State support of public higher education has rapidly declined relative to total state spending. Much of this decline in support is due to the rapid growth in spending on such things as Medicaid. However, relative support of public higher education varies significantly between states. This study applies Tandberg’s (2009) fiscal policy framework created to explain state support of public higher education in order to evaluate the relationship between various factors and states’ relative support of higher education. While Tandberg’s fiscal policy framework accounts for traditional economic and demographic factors in explaining state support for higher education, it also draws attention to political influences as well including the impact of state-level interest groups. Using cross-sectional time-series analysis these relationships are explored over a 19-year period. The findings provide evidence of the significant impact of interest groups and politics on state fiscal policy in regard to higher education.

ABSTRACTResearchers have shown renewed interest during the past decade in the relationships among politics, policy, finance, and governance of higher education at the state level. Little attention, however, has been paid to state higher education executive officers (SHEEOs), the individuals responsible for leading the agencies that oversee higher education in the 50 states. Of noteworthy interest is the fact that the states vary in regard to the nature of the institutional relationship between the SHEEO and the governor, who has been shown in the literature to exert a strong influence over state higher education policy and finance. To explore the relationship, we developed measures that capture relevant dimensions of the relationship between the 2 actors and tested the impact of these measures on state spending for higher education using a unique panel of state-level data spanning more than 2 decades. We found that the institutional relationship between the SHEEO and the governor has a significant impact on state support for higher education.

This study estimates the extent that state financial support for higher education raises college attainment. Despite its manifest importance for policy, this is the first study to estimate this effect directly. Many studies have estimated the effect of college price on attendance, but state support for higher education and college price do not have a one-to-one correspondence. Moreover, state support for higher education can affect enrollment through college quality, not just price. A two-stage instrumental-variables approach is employed to account for the possibility that state funding for higher education may endogenously depend on anticipated college enrollment. Using 22 years of U.S. interstate data (1985-2006) and controlling for fixed state effects, the results of this study indicate that state funding for higher education has significant causal effects on both college enrollment and degree attainment. The estimated state-support elasticity of college enrollment and college degree attainment is about 0.35.

Most public colleges and universities rely heavily on state financial support. As state budgets have tightened in recent decades, appropriations for higher education have declined substantially. Despite concerns expressed by policymakers and scholars that the declines in state support have reduced the return to education investment for public sector students, little evidence exists that can identify the causal effect of these funds on long-run outcomes. We present the first such analysis in the literature using new data that leverages the merger of two rich datasets: consumer credit records from the New York Fed's Consumer Credit Panel (CCP) sourced from Equifax and administrative college enrollment and attainment data from the National Student Clearinghouse. We overcome identification concerns related to the endogeneity of state appropriation variation using an instrument that interacts the baseline share of total revenue that comes from state appropriations at each public institution with yearly variation in state-level appropriations. Our analysis is conducted separately for two-year and four-year students, and we analyze individuals into their mid-30s. For four-year students, we find that state appropriation increases lead to substantially lower student debt originations. They also react to appropriation increases by shortening their time to degree, but we find little effect on other outcomes. In the two-year sector, state appropriation increases lead to more collegiate and post-collegiate educational attainment, more educational debt consistent with the increased educational attainment, but lower likelihood of delinquency and default. State support also leads to more car and home ownership with lower adverse debt outcomes, and these students experience substantial increases in their credit score and in the affluence of the neighborhood in which they live. Examining mechanisms, we find state appropriations are passed on to students in the form of lower tuition in the four-year sector with no institutional spending response. For community colleges, we find evidence of both price and quality mechanisms, the latter captured in higher educational resources in key spending categories. These results are consistent with the different pattern of effects we document in the four-year and two-year sectors. Our results underscore the importance of state support for higher education in driving student debt outcomes and the long-run returns to postsecondary investments students experience.

Most public colleges and universities rely heavily on state financial support. As state budgets have tightened in recent decades, appropriations for higher education have declined substantially. Despite concerns expressed by policymakers and scholars that the declines in state support have reduced the return to education investment for public sector students, little evidence exists that can identify the causal effect of these funds on long-run outcomes. We present the first such analysis in the literature using new data that leverages the merger of two rich datasets: consumer credit records from the New York Fed's Consumer Credit Panel (CCP) sourced from Equifax and administrative college enrollment and attainment data from the National Student Clearinghouse. We overcome identification concerns related to the endogeneity of state appropriation variation using an instrument that interacts the baseline share of total revenue that comes from state appropriations at each public institution with yearly variation in state-level appropriations. Our analysis is conducted separately for two-year and four-year students, and we analyze individuals into their mid-30s. For four-year students, we find that state appropriation increases lead to substantially lower student debt originations. They also react to appropriation increases by shortening their time to degree, but we find little effect on other outcomes. In the two-year sector, state appropriation increases lead to more collegiate and post-collegiate educational attainment, more educational debt consistent with the increased educational attainment, but lower likelihood of delinquency and default. State support also leads to more car and home ownership with lower adverse debt outcomes, and these students experience substantial increases in their credit score and in the affluence of the neighborhood in which they live. Examining mechanisms, we find state appropriations are passed on to students in the form of lower tuition in the four-year sector with no institutional spending response. For community colleges, we find evidence of both price and quality mechanisms, the latter captured in higher educational resources in key spending categories. These results are consistent with the different pattern of effects we document in the four-year and two-year sectors. Our results underscore the importance of state support for higher education in driving student debt outcomes and the long-run returns to postsecondary investments students experience. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

L. Halkiv L. Halaz M. Bihus 1Lviv Politechnic National University 2Lviv Polytechnic National University 3Ivan Franko National University of Lviv, Department of International economic and Investment Activity Purpose. The purpose of this article is to improve theoretical, methodological, and applied foundations of the study of the educational component of human potential. Design/methodology/approach. Scientific works of domestic and foreign scientists studying issues related to human potential, labor market, and education financing, as well as official statistical data that characterize these issues, formed the information, theoretical, and methodological basis of the study. To achieve this purpose, the article uses a set of scientific methods that have ensured conceptual integrity of the study, in particular: the method of theoretical generalization and the abstract method were used to systematize scientific results and formulate conclusions; the method of structural analysis was used to study education costs in terms of individual components; concentration and differentiation analysis was used to study distribution of costs of financial agents; dynamic modeling was used to build trends in the number of educational institutions, the number of students, and the total cost of education; the tabular method was used for a compact representation of quantitative indicators; the graphical method was used to visualize the results of the study, etc. Findings. The functioning of the country's education system has a decisive influence on the quality of human potential. Graduates who complete a higher education program are more likely to work in knowledgeintensive jobs and earn higher salaries. Workers with higher education are usually more likely to be formally employed and less likely to lose their jobs. Effectiveness of the education system depends on its financing. The results of the analysis of data on expenditures on education in Ukraine indicate the following patterns: most funds are allocated for educational services provided by higher education institutions, for the first stage of secondary education and primary education; private firms and corporations most often allocate their funds for post-secondary education; the share of state institutions among financial agents carrying out activities in the field of education reaches about 90 %; the maximum costs of the public sector are observed at the ISCED 0-3 educational levels; the network of institutions and the contingent of students receiving vocational, technical, and higher education are decreasing; there is a declining trend in the level of education expenditures in the Consolidated Budget expenditures. The rise in the price of educational services against the background of an unbalanced labor market leads to a loss of knowledge; additional retraining expenses; increase in social benefits. Practical implications. The materials presented in the article can be useful to representatives of institutions and scientists whose activities are related to the financing of education and the labor market. Originality/value. In the article, the author. The level of education of an employee is considered as one of the components of their potential. This component allows an employee to compete successfully in the labor market. In Ukraine, financial resources of the population cover more than 30 % of doctoral studies and their equivalents, as well as about 25 % of expenditures cover higher education. Given the spread of poverty and the weakening of state support for higher education, Ukrainians will face the problem of the provision of financial support for universities.