Why Paying for Public Colleges Really Pays Off

The disinvestment and reliance on higher student fees and tuition creates significant risks not only for students—but for states, too.
January 2014
The University of Virginia
Virginia's failure to fund higher education is threatening its economy. Flickr/EWG4XUVA
By Frank Shafroth  |  Columnist
Director of the Center for State and Local Government Leadership at George Mason University

States are finally starting to see increasing revenues. Whether this windfall is temporary or represents a sustained recovery, it is a welcome change and allows governors and state legislators to make different governing choices than they have been able to for nearly half a decade.

One area that will surely garner public leaders’ attention will be higher education. The options range from whether to privatize state universities and get out of the business altogether, to whether to make it free, as Oregon is doing.

Nationally, from 2001 to 2012, state funding per student in higher education dropped by 33 percent while tuitions at state public institutions climbed by 46 percent over roughly the same period. The unprecedented increases in state tuitions have been a key element in record levels of defaults on student loans, not to mention those who drop out. The consequences of either one can have state and local ramifications, with defaults wreaking more serious economic havoc. Dropping out can mean the student forgoes as much as 71 percent in higher earnings, which, for the state, means significantly lower taxable earnings.

Last year, the Volcker State Budget Crisis Task Force for Virginia identified the state’s reduction in K-12 and sharp curtailment of support for higher education as a threat to Virginia’s ability to continue to be a “world class business destination.” It noted that Virginia, once the nation’s cradle of higher education, now ranked 40th in state support per full-time equivalent student, and wondered “whether Virginia will sustain the excellent reputation its higher education institutions currently enjoy with increasing state resources.”

Thus the General Assembly directed the Virginia Joint Legislative Audit and Review Commission (JLARC) to study the cost efficiency of the state’s public colleges and universities, and identify opportunities to reduce the cost of higher ed. A state’s disinvestment in higher education has both short-term and long-term taxing consequences. In Virginia, public higher ed institutions are not only critical to the state’s economy, but also to state revenues.

The state revenue benefits are derived in part from the total economic footprint attributable to one year of higher education operations, which is $28 billion in Virginia gross domestic product. In addition, each year of state public higher education operations generates $2 billion in longterm state revenue. Every dollar spent on public higher education by the state is associated with an additional $1.29 in state revenue and an increment of $17.40 to Virginia gross domestic product.

In its report, JLARC reported that its review of major trends in public higher education nationally and in Virginia found that:

  • Most spending at public four-year higher education institutions is on activities other than direct instruction. Spending on student housing, dining and intercollegiate athletics—through auxiliary enterprises—has been the(on average) at Virginia institutions.
  • Nationally, state funding as a percentage of total revenue at institutions has declined. In Virginia, state general funding per student declined 22 percent between 1991-1992 and 2011-2012.
  • Average annual income increased far less than the price of higher education nationally, necessitating a large increase in the percentage of students who borrow and the amount they borrow. The average annual student loan amount in Virginia almost tripled between 1992-1993 and 2011-2012 to nearly $10,000.

In Virginia as elsewhere, the disinvestment and reliance on higher student fees and tuition unrelated to educational output creates significant risks. It could diminish opportunities for many students to go to the state’s institutions of higher learning—and weaken state individual and corporate tax revenues.

State leaders appear to have an important assignment to study their public education finance responsibilities.