CHAPTER 2: STATE POLICIES FOR AFFORDABLE HIGHER EDUCATION

Affordability is a key element of college opportunity. Public policies-at the federal level and in all states-recognize its importance. Since the passage of the G.I. Bill after World War II, Americans have been increasingly committed to the idea that talent and motivation-rather than financial resources, ethnicity, or geography-should govern college opportunity. College students in public and private institutions are subsidized generously to foster their talent. Yet family wealth and income remain the best predictors-better even than academic preparation-of who will enroll in college and which colleges they will attend. For the country and the states, as well as individuals, barriers that make higher education unaffordable serve to erode our economic well-being, our civic values, and our democratic ideals.

The nation cannot close this gap in educational opportunity without addressing the public policies that influence affordability. In the first section below, we examine policies for affordable higher education in five states. In the second, we extend our view to include the impact of cyclical state and national economic conditions, and offer examples of state and institutional policies to stem the apparently endless cycle of rising costs and declining affordability.

Affordable Higher Education: A Snapshot

Five states received "A" grades in the affordability category of Measuring Up 2000, the national report card on state performance in higher education.¹ Each of these best-performing states-California, Illinois, Minnesota, North Carolina, and Utah-developed its own policies to assure students and families of an affordable education. State policies, not just a state's wealth, make a difference in the affordability of higher education: Of the five "A" states, only California and Illinois are in the top ten states in terms of Gross State Product, and two states are at or below the national average in terms of their population's income.

The criteria used to measure affordability in Measuring Up 2000 were designed to help states examine the relationship between family income and tuition and other costs of attending college. The indicators also were designed to help states examine the effectiveness of their strategies for affordable higher education. (For example, how effective are high-tuition/high-aid policies vs. low-tuition policies?)

Our analysis of indicators in Measuring Up 2000 shows that no one policy assures affordability-there is no panacea. For example, states with very generous financial aid programs for low-income students, but without tuition policies that take into account family income, rarely perform well on affordability measures. Similarly, low tuition does not assure an overall college price that is affordable for all. Rather, affordable higher education in most states is achieved through the combination of tuition policies that take into account family income in that particular state, support for need-based financial aid, and, in some cases, colleges that charge low tuition. Specifically, states that were rated most affordable share at least two of three characteristics:

• Educational expenses (tuition plus room, board, books, etc., minus financial aid) at two- and four-year public colleges and universities do not exceed, generally, 20 to 25% of average family income in the state.
• State spending for need-based financial aid matches or even exceeds the total amount that low-income families in the state receive from the federal Pell Grant program.
• Low-priced colleges provide educational options for even the lowest-income residents, who may perceive they are unable to pay tuition, even after financial aid.

States use many methods to set tuition policy. Explicit long-term policies are rare. When they exist they often focus more on institutional criteria than on the impact of tuition on students and families.

• A common practice is to review the tuition levels of similar colleges in other states. Historically, the effect of this method is to ratchet tuition upward.
• A second practice is to set tuition as a fixed share of total educational costs. This results in higher tuition levels when revenues from other sources, such as state appropriations, are growing most rapidly. On the other hand, if fully implemented, this policy would reduce tuition when other sources of revenues are cut.
• A third method, which in difficult economic times often becomes the default policy, is to "back-fill" state revenue shortfalls with tuition increases.

Tuition is a primary factor in the increased cost of college attendance. In the best-performing states, as identified by Measuring Up 2000, tuition levels are within reach for the families living in those states. These states achieve reasonable tuition levels by policies that: (1) maintain low tuition (for example, Utah and North Carolina); or (2) combine higher tuition with generous financial aid (for example, Minnesota). Because family income varies fairly widely by state, accounting for tuition's impact on students and families in each state is critical to assessing the affordability of college.

State Financial Aid

The combination of state need-based financial aid and Pell Grants (the major federal need-based financial aid program) substantially reduces the net price of higher education for the bottom two or, in some states, three income quintiles (40 to 60% of a state's families). A good example of this combined effort is Illinois, which offers more need-based financial aid to students who are eligible for the Pell Grant than any other state.

Low-Priced Colleges and Universities

Some states perform well on affordability by assuring that one sector of higher education-most often community colleges-has low prices, and is available to almost all motivated applicants. California is the best example of this policy. Its community colleges are the least expensive in the nation, and enroll more than 65% of the state's postsecondary students. North Carolina employs a similar policy approach with its low-priced community colleges.

Affordable Higher Education: A Longer Term View

The decline in the affordability of higher education can be a policy issue in any state in any year. A much broader problem arises as we look at rising costs over several years, and at appropriate policies to mitigate them.

The Cycle of Erosion

The erosion of affordability of higher education described in this report is felt by all but the wealthiest. In the 1990s, as the share of family income that was needed to pay for college increased and debt burdens escalated, public concern about college affordability became more widespread. After the steep tuition increases that accompanied the recession of the early 1990s, college affordability became a more prominent issue for the middle class-those families and students not eligible for traditional means-tested student financial assistance. States and the federal government, and colleges and universities, responded by shifting the emphasis of financial aid from low-income students who might otherwise not enroll in college, to relief for those more affluent groups who were attending college. These benefits took the form of federal income tax credits and deductions for educational costs, tax-sheltered savings plans, state merit aid programs, and institutionally funded scholarships and discounts (for more information about federal tax credits, federal tax deductions, and tax-sheltered savings plans, see chapter 6).

Public higher education is highly regarded in most states.² When states are prosperous, as in the late 1990s, many invest generously in public colleges and universities, often without regard to the long-term cost implications of these investments. Under such circumstances, tuition may be frozen (in effect, reduced in constant dollars) or even cut. Students whose college careers coincide with these periods of prosperity benefit from stable, even declining, levels of tuition. However, when the inevitable recession occurs, states often are unable or unwilling to sustain these levels of expenditure, and higher education budgets are reduced.

Public colleges then usually seek to recapture lost state funds through tuition increases. Regardless of where the legal authority for setting tuition may reside in a state, political and educational leaders go along with this response because: (1) the new revenues from tuition buffer the colleges and universities from the full impact of state cuts, and cutting higher education becomes more acceptable than cutting state programs that lack an alternative revenue source; and (2) college and university leaders assert that their budgets cannot accommodate reductions without a significant decline of quality or accessibility.

For students and families, this cyclical pattern results in significant and unplanned tuition hikes for those who enroll or aspire to enroll during recessions-when growth in personal income is sluggish at best, when unemployment is high, and when states are least likely to increase commitments to student financial aid, for the very reasons that caused the budget cuts and tuition increases in the first place. And because almost all students and their families are affected, the demand for relief is widespread. As we have seen, the precipitous tuition increases of the early 1990s were followed, as the economy recovered, by tuition freezes and rollbacks and various forms of middle-class relief. The stage then is set for the next cycle: generous appropriations, higher expenditures that cannot be sustained, another economic downturn, and then a repetition of the standard recessionary responses.

In 2001 and 2002, many states and public colleges embarked on this cycle for the third time in little more than two decades. The most predictable outcomes are further erosion of affordability of higher education for most Americans, and an increase in the number of people in all income categories who demand financial relief.

The decline in college affordability is a broad national concern, but its most pernicious effects are on the lowest-income Americans-those who attend colleges in lower numbers and, when they do enroll, must borrow more in relation to their incomes. The shift in emphasis of financial aid in the 1990s-by the federal government, by some states, and by many colleges and universities-away from those students with greatest need has not addressed the income gap in college attendance. Nor has it lessened the nation's need to develop the talent of all Americans who are motivated and able to benefit from education and training beyond high school.

State Policy: Breaking the Cycle

States and higher education can no longer afford to be "Shocked! Shocked!" by each unexpected recession. Economic times are either good or bad-never normal-and their succession is inevitable. It is this recurrence, not any single recession, that threatens college opportunity. The annual costs of a student's higher education have increased faster than family income, and, absent mitigating public policies, states, institutions, and families will continue to stumble through cycles of eroding affordability. Can these cycles be broken? We believe they can, but doing so will require different approaches during good as well as bad economic conditions.

Breaking the Cycle in Hard Economic Times

When states confront budget shortfalls-the common condition as we write-it is unlikely that public colleges and universities will be exempt from cuts. For state policymakers, avoiding disproportionately large budget cuts during hard economic conditions is the first step in preserving college affordability. When higher education reductions are significantly larger than those required of other state programs, large and precipitous tuition increases almost invariably follow.

When budgets are cut, we favor a principle of shared responsibility. Students should expect to pay higher-but not excessively higher-tuition. Colleges and universities should expect to absorb their share of budget shortfalls, and do so by allocating reductions in ways that are least detrimental to accessibility and educational effectiveness. College presidents and trustees should have flexibility in allocating reductions within these parameters. Those considering tuition increases should take into account the economic circumstances of state residents and the relationship of tuition levels to family income. When tuition is increased, states should exempt need-based student financial aid programs from reductions in state appropriations, and should augment these programs to mitigate the effect of tuition increases on the neediest students. Finally, states that are experiencing or anticipating enrollment increases should work with colleges and universities to allocate budget cuts to protect educational opportunity over the long-term.

Breaking the Cycle in Prosperous Times

The cycle of eroding affordability begins with the escalation of costs in times of prosperity-costs that are then transferred to students in recessions. Over the long-term, statewide and national needs for educational opportunity, affordable higher education, and economic growth will require more, not less, public investments by states. And "more" has qualitative, as well as quantitative, dimensions. In times of prosperity, state investments should be made with greater emphasis on cost-effectiveness than often has been the case in the past. For example:

• States should systematically and rigorously explore the potentials of information technology to improve the educational effectiveness and cost-effectiveness of on-campus and off-campus instruction. While technology often requires significant investment, some portion of these investments should reduce other costs.
• Programs that enable qualified high school students to gain college credit, through testing or while taking college courses in high school, should be more widely available. Students should be encouraged and supported to enroll in them. And colleges should be expected to credit this work toward graduation when it meets the standards expected of regularly enrolled students.
• States should expand capacity in cost-effective undergraduate education. They should avoid creating new capacity for research and graduate education-an expensive form of "mission creep"-in the absence of clear evidence of national and state needs.
• The creation of new colleges and universities in isolated regions usually assures low enrollments and high costs per student, even though these institutions may represent "economic development" in the communities in which they are located. Alternatives to full-service campuses, such as learning centers and distance education, can often provide more responsive, flexible, and cost-effective education to underserved communities.
• Tuition increases should be moderate, gradual, and predictable, and should take family income in each state into account. In both prosperous and declining economies, financial assistance for low-income families should be increased whenever tuition is increased.
• Financial aid and tuition reductions that primarily benefit higher-income students are usually an inefficient use of public dollars, for the students who benefit are those most likely to attend college anyway, and often already are receiving the largest public subsidies at highly selective and highly subsidized state universities. Focusing student financial aid programs on college-eligible students with financial need is a more efficient use of state resources. The most efficient and effective programs are means-tested; some include academic requirements; they provide aid to students attending public and private colleges and universities.

Patrick M. Callan is president and Joni E. Finney is vice president of the National Center for Public Policy and Higher Education.

¹ National Center for Public Policy and Higher Education, Measuring Up 2000: The State-by-State Report Card for Higher Education (San Jose, CA: 2000).

² John Immerwahr and Tony Foleno, Great Expectations: How the Public and Parents-White, African American and Hispanic-View Higher Education (San Jose, CA: National Center for Public Policy and Higher Education, 2000).