Generous state financial support in the 1990s left higher education in sound financial condition at the end of the decade. As discussed in earlier sections, in the coming decades many states that have had low college participation rates will be faced with significantly higher enrollment demand. And the cohort of prospective students will include larger proportions of students from low-income families and from historically underrepresented ethnic groups. When college finances were healthy in the 1990s, it might have been expected that new state programs would have focused on these needs of the latter groups. It is clear that the new programs did not.
Instead, the major initiatives in many states were the establishment and support of non-means tested ("merit") student aid programs. States responded to middle-class financial anxiety about college costs, to concerns about "brain drain"--the migration of high-achieving high school graduates to out-of-state colleges--and to the attraction of rewarding student achievement. These programs grew rapidly. From 1996-97 to 1999-2000, state non-need-based financial aid increased by 90%, from $459 million to $873 million; state need-based aid grew by 24%, from $2.6 billion to $3.2 billion.31 The structures of the merit programs vary considerably across states, but most are likely to have at most a marginal impact on the enrollment of underserved populations. Instead, these increasingly well-financed programs with politically potent middle-class beneficiaries now compete with need-based financial aid for state support, a competition that is certain to intensify during a recession.
At the federal level, a program for tuition tax credits was the major initiative of the 1990s. The beneficiaries are families with taxable incomes between $40,000 and $90,000, particularly those with students at colleges that charge high tuition. What appears to be an unintended consequence is that states with low-tuition public colleges and universities can shift costs to the federal government by raising tuition and encouraging eligible students and families to claim the credit. However, only students and families who owe taxes are eligible; lower-income students and their families who do not owe taxes are not eligible.32 Most states and public institutions have not yet raised tuition to capture this new federal subsidy, probably because of the relatively generous state appropriations of recent years and the political unpopularity of tuition increases. In a recession, however, it is unlikely that states or public colleges and universities will leave this federal subsidy "on the table," even though tuition increases to capture the subsidy will impede access for low-income students without increases in need-based student financial aid. However, recent history suggests that recessions are the time when states are least likely to make such investments. And federal tax credits may make it easier to reduce state subsidies for higher education, and to shift support to other parts of the state budget. At the federal level, need-based student aid, unlike tax credits, must compete with other domestic programs in the annual appropriations process, a competition that inevitably intensifies during recessions.
It is not the purpose of this essay to evaluate these state and federal initiatives. Whatever their merits, they represent another variable in the complexities of public financing for higher education. In responding to the recession, states will face enormous difficulties in understanding and working with the interactions among state grant programs, federal grant and tax credit programs, institutional aid, student qualifications, and family tax liabilities. I do not envy their task.
32 See Kristin D. Conklin, Federal Tax Credits and State Higher Education Policy (San Jose: National Center for Public Policy and Higher Education, Dec. 1998).