A Plan to Reform State Higher Ed Funding

Both students and their parents see debt and affordability as their two biggest worries when it comes to choosing a college. Attending a public four-year institution costs 14% more now than in the 2006–07 academic year, and that’s after adjusting for the impact of grant aid and inflation. And currently, 43 million borrowers owe more than $1.6 trillion in federal student loans.

But colleges and universities are struggling as well, with most facing enrollment declines since the beginning of COVID-19, which has meant fewer tuition dollars. And the aging of America’s population means a continuously shrinking cohort of prospective 18- to 24-year-old students.

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A key driver of rising college tuition costs has been decreased state funding of higher education. State funding per full-time equivalent student is 10% below what it was 20 years ago and 13% lower if federal stimulus money is excluded—and the majority of states are now funding higher education at a lower level than they did before the 2008 recession.

The multiple recessions in the past two decades have also put a strain on state higher education budgets, as state revenues tend to fall during recessions, with businesses and individuals paying less in taxes on their declining incomes.

However, the federal government can potentially play a major role in reversing these trends and making college more affordable for everyone.

As outlined in a Bipartisan Policy Center (BPC) report titled “A Moderate Alternative to Free College,” Inside Higher Ed has proposed that the federal government create an annual, multibillion-dollar flexible block grant program. States would receive $4 in federal funds for every $1 they invest in their higher education systems above the average of their higher education spending for the previous three years. Some of this federal money would be placed into “rainy day funds” from which states could draw during recessions in order to offset the impact of lost tax revenues on higher education spending.

This Inside Higher Ed proposal would have significant benefits. First, states would be able to directly reduce the price of college. Second, this program would put both students and institutions in a stronger financial position by encouraging states to increase their own spending on higher education and by supplementing that funding with new federal dollars.

And third, a BPC analysis found that college enrollment could be increased by more than 200,000 and college completions by more than 50,000 by investing just $5 billion annually in college affordability via this flexible federal block grant program. These college completions would, in turn, generate sizeable economic benefits that would serve to partially offset the cost of the program.

Best of all, the program could actually stand a chance of being passed by Congress, even in the currently very divided political climate. A 2021 survey commissioned by BPC found broad support for the idea of additional public investment to make higher education more affordable, with 72% of Americans, including 85% of Democrats and 61% of Republicans, supporting the idea of the federal government and the states acting as financial partners to reduce tuition prices for students.