The voices of Urban Institute's researchers and staff
May 23, 2018

Would increases in state appropriations stop tuition prices from rising so fast?

Tuition prices and state funding levels for public higher education are linked in the political process and in institutional decisionmaking. When states cut appropriations, public institutions raise tuition. This relationship was on display recently, when the Missouri House agreed to block cuts to higher education funding in return for promises from most of the state’s public institutions that they would not raise tuition by more than 1 percent.

Despite this clear connection, however, it is easy to exaggerate how much changes in appropriations explain and are reflected in tuition increases.  

There is no question that public college tuition prices rise most rapidly during and immediately following economic downturns, when states slash budgets and college enrollments swell as labor market opportunities dry up. Nonetheless, when colleges are short of funds, they have options other than simply raising tuition.

Annual Percentage Change in State and Local Funding Per Student for Higher Education and in Tuition and Fees at Public Institutions

If they have sufficient market strength, colleges can enroll more out-of-state residents and international students, who pay higher prices. Or they can cut expenditures. (Although cost reductions can help keep college prices down, they don’t necessarily make college a better value. Some cuts reflect increased efficiencies, but reduced spending on instruction and other institutional supports for students can be quite damaging to educational outcomes.)

Of course, other factors contribute to rising tuition. If this were not the case, there would not be such an incessant upward trend in prices. Rising wages, increasing health care costs, technology, and the demand for new and better facilities, equipment, and opportunities put upward pressure on the cost of educating students and the prices charged. And institutions don’t always find the most cost-effective ways to provide education.

Published Tuition and Fees Relative to Level in 1987–88

Another complication is the distinction between published tuition prices and the net prices students actually pay. Financial aid is a rapidly growing component of institutional budgets. Rising tuition prices increase the need for financial aid. These discounts mean that when institutions raise sticker prices by a dollar, they might wind up getting less than an extra dollar from many students. In this spiral effect, the larger the financial aid budget, the more the institutions have to increase sticker prices to generate new revenues.

There is no simple formula that describes the relationship between declines in per student funding and increases in tuition prices. A major difficulty is that an overall average conceals variation across institutions. Colleges that have strong market positions with many applicants willing and able to pay their prices are most likely to respond to budget cuts by raising tuition, frequently using financial aid to protect low-income students, but able to increase tuition revenues from high-income students.

Selective flagship universities like the University of Virginia, the University of Michigan–Ann Arbor, or the University of North Carolina at Chapel Hill are examples of institutions with strong market positions. But these universities have other options, like attracting more out-of-state and international students.

Other public institutions have fewer options and are likely to meet declines in state funding with a combination of decreased expenditures, which might reduce student success, and increased prices, which might strain student budgets.

The debate about how much state funding declines explain public college tuition prices is like many disagreements in a highly politicized environment. The yes-or-no extremes do not capture the nuanced reality.

Restoring state funding levels, which average 7 percent per student less than a decade ago (adjusted for inflation), even after five consecutive years of increase, would ease the pressure on tuition. Perhaps more important, it would provide needed funding for public colleges and universities to strengthen opportunities for student success. But it would not be sufficient to stop the upward spiral of tuition prices.

People mill about on the campus of Hunter College of The City University of New York, on April 10, 2017 in New York City. Photo by Drew Angerer/Getty Images.

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