Financing Postsecondary Education: The Federal Role - October 1995
The paper assumes that these objectives cannot be met by action of the federal government alone but must be carried out in concert with state governments, which are the primary providers of public support for postsecondary education. The paper's proposals on student financial aid deal exclusively with joint federal/state partnerships for grant programs and assumes that the federal government will continue to provide access to loan capital through the Direct Lending program and the Guaranteed Student Loan program. Although the writer recognizes that the changes proposed would alter the accountability mechanisms employed by the federal government, this issue is not covered within the scope of this paper. Nor does the writer examine the implications of the proposed changes on independent nonprofit and proprietary institutions, important issues which will need further study.
To offset a portion of these costs to students, states have over the years created their own need-based student aid programs. In 1993-94, the states spent about $2 billion on need-based aid (as compared to approximately $6 billion spent by the federal government). While all states have some type of program, the bulk of need-based aid is concentrated in a very small number of states. Seven states (New York, California, Illinois, Pennsylvania, New Jersey, Ohio, and Minnesota) account for 61 percent of the total aid awarded (NASSGP, 1994). Although state support for need-based aid has grown in recent years, it appears that these increases have not been great enough to cover the increases in costs to students. The College Board, for example, reports annual tuition increases in the public sector for 1991, 1992, and 1993 at 8.4 percent, 6.5 percent, 6.4 percent, respectively. NASSGP reports median increases for state aid for 1991, 1992, and 1993 at 3.8 percent, 6.4 percent, and 3.2 percent respectively.
One of the striking features of the current federal/state partnership in financing postsecondary education is its inconsequential nature. The two entities --federal and state--essentially operate on separate tracks. The federal government establishes its policies with no coordination with, or influence on, state entities. States, in response to their own political and economic determinants, directly set, or indirectly influence, the price charged for attendance at public institutions. A similar lack of coordination often takes place at the state level as institutional aid, tuition and fee policy, and student aid appropriations often respond to different dynamics. Few states have attempted, for example, to make up for the declining purchasing power of the Pell Grant or have sought to moderate tuition in response to cutbacks in federal aid. Nor have state actions had much influence on federal policy.
This paper proposes to change this two-track policy setting. It establishes principles for the coordination of state pricing policy with federal aid policy. It starts with the assumption that the setting of tuition and other costs by a state or an institution is the determining variable in the equation. Influencing that pricing decision and subsequent state actions should be an important (but not the only) goal of federal policy. At the same time, federal policy should be carried out in such a manner as to ensure the flexibility of states to take different paths to the same end- affordability. Some states will continue to choose the "low tuition" route; others may decide to raise tuition and increase their commitment to need-based aid. The federal government should maintain its current commitment to need-based aid but use that aid in a way either to keep tuition costs down or to increase state commitment to need-based aid.
This paper proposes the creation of a new "Super SSIG" that would combine all existing federal need-based grant programs into a partnership program with the states. The Super SSIG would have the following characteristics:
Table 1 presents a hypothetical scenario for a federal/state grant formula. In State A, a high tuition state, college costs to the student are $6,000, to which the federal and state governments combined have committed to cover 70 percent of these costs. In the base year, the state's obligation for need-based grants is set at $13.9 million. In year two, the state decides to increase its tuition or other costs to students by $200. (The number of eligible students remains the same.) In order to remain eligible for the continuing federal grant, the state is obligated to increase its appropriation by an equal amount, in this case 3.3 percent.
In State B, a low tuition state, the base year obligation of the state is $6.9 million, which earns the state an additional $14.1 million federal block grant. In year two, the state decides to increase its tuition by $1,000 which obligates the state to increase its need-based aid funds by 33 percent in order to maintain its eligibility for federal funds. In this illustration, the federal government has limited the growth in its obligation to 3 percent, plus the additional costs of financing 200 new eligible students. This action results in a shortfall of $4.3 million (unmet need). Given that the increases in tuition will be paid by all students, not just those receiving aid discounts, the state may decide to maintain or even increase its share of total costs. If the state does not, the share borne by students will need to be increased. Falling below a minimal share of state support could put eligibility for federal funds at risk. A reciprocal obligation would exist on the part of the federal government. Failure to maintain its commitment would free the state from its obligations as well.
|Total Need (in millions)||$42||$43.4||$21||$28.6|
ln this model, the state decision on tuition and other college costs is the determining variable. States choosing to maintain low tuition or modest increases would be rewarded with continuing eligibility for federal dollars and proportional increases in federal support. States choosing to increase tuition significantly would face commensurate obligations to increase state grants. If those increases exceeded caps on growth in federal funds, the state could choose to lower the share of need met by governmental support or use the additional revenue generated by tuition increases to maintain the 70 percent share.1
An alternative approach to the Super SSIG would be aimed at changing the relative mix of federal and state contributions to aid. Instead of subsuming the current Pell Grant program, the current SSIG might be expanded significantly, say to a $1 billion annual appropriation. States with only modest commitments to need-based aid would be required to increase significantly their commitment (over time) in order to maintain eligibility. States would continue to set standards for need and eligibility as they currently do for SSIG funds, but maintenance of effort formulas would be aimed at accelerating the match. Some have suggested that the current ratio of three dollars of federal grant money to one dollar of state money be changed so that in future years, the ratio might be changed to three to two or two to one by increasing state commitments to need-based aid. The problem, however, is illustrated by comparing the current federal-to-state matches in two states, New York and Alabama. In the former, the $700 million in federal grant support is matched by $600 million in state support. In Alabama, the $135 million in federal support is matched by only $1 million in state support.2
From the federal perspective, this would be a powerful incentive to make up for some of the proposed cutbacks in federal aid. From a state perspective, especially among states with relatively small aid programs (and relatively low tuition), this could be viewed as a heavy- handed federal intrusion.
The Development of Education Trust Accounts: This is an idea that could be combined with the Super SSIG. The establishment of education trust accounts for all school-age children was proposed by McGuinness in 1992 and Armajani, Heydinger and Hutchinson in 1994. Such education trust funds might include state savings plans, service earnings and credits prepayment plans and other vehicles for individual contribution. Upon determination of eligibility for need-based grants, the state and federal governments would credit the individual account and the institution carrying the enrollment would make withdrawals. One of the side benefits of such accounts would be considerable simplicity and regulatory relief for institutions. Changes in federal and state policies as to eligibility and need would be handled by the state agencies, not institutional financial aid offices. Additional federal and state appropriations would need to be obtained in order to establish the endowment funds for future generations. (This approach is similar to the "I Have A Dream" programs upon which the current early intervention initiatives of the federal government are based.)
Evaluating Future Proposals: Given the current budget-cutting climate in the Congress, there may be a variety of future proposals which, in a similar fashion to welfare reform, will seek to off-load federal responsibilities to the states through block grants. This is clearly not the intent of this proposal. This writer would suggest the following criteria for judging the value of state/federal partnership programs: (1) the degree to which they maintain and, if possible, increase the commitment of both the federal and state governments to need-based grants; (2) the degree to which they provide flexibility at the state level in maintaining either low tuition/low aid or high tuition/high aid strategies; and (3) the degree to which they contribute toward the goal of affordability.
The residency and tuition policies of states can result in both provinciality as well as irrational subsidy policies that work against the best interests of both individuals and states. Take, for example, the state of Colorado, which is experiencing considerable in-migration from other states, especially California. A recent in-migrant with college-age children immediately becomes eligible, independent of need, for a significant state subsidy to attend a Colorado public institution. That in-migrant may have contributed little or nothing to the state tax base that pays this subsidy, and his children, given the current mobility of the population, may not spend much of their subsequent working life in the state. At the same time, an out-of-state applicant who applies, for example, to the popular Boulder campus of the University of Colorado, will pay tuition rates set at 120 percent of educational costs and receive no state subsidy, even though that person may well spend the rest of his or her working life in the state. Moreover, that California applicant may have been motivated to apply to the University of Colorado, Boulder, because of the lack of space in a comparable California institution.
In a 1994 seminar at the Brookings Institution, Gordon Davies, director of the State Council of Higher Education for Virginia, cited the expected growth in his state as a reason for supporting portable state aid. "This would attack two problems at once, one being student need and the other, how we (in the South) handle a tremendous amount of enrollment growth. Maybe it is that last piece (mobility) that makes [the Super-SSIG] attractive." (Gladieux and Hauptman, 1995, p.116)
From a national perspective, promoting the free flow of students across state lines has the same advantages that led the founding fathers to prohibit the states from disrupting the flow of commerce across state lines. In fact, the application of the "interstate commerce" clause has some applicability to tuition and residency laws in the states as noted by a recent ruling of a federal district court in Michigan. (U.S. Court of Appeals, 1994) By acting as a counterforce to the natural inclination of states to reserve subsidies for "their residents," the federal government can be a powerful force for maximizing the effective use of existing institutions and by encouraging students and their parents to be able to match their education decision making with the national realities of the job marketplace.
Bringing the "Campus" to the Student: In recent years, "mobility" has taken on a new meaning. The federal government should be a force for promoting not only the mobility of students to institutions but also of institutions to students. The emerging national and global digital networks, which can transmit voice, video, and data not only to remote sites but also to the desktop in a student's home and office, already is spawning a host of new and traditional providers to deliver instruction to distant sites.
One of the characteristics of these emerging networks is that they show no respect for political boundaries. Already new consortia of existing institutions or whole new entities are offering courses, and sometimes complete degree programs, to national and international markets. This can be done over fiber optic cable and telephone lines that connect computers and video equipment to vast networks of information, data, and instructional programs. Add to this emerging electronic highway existing cable systems and satellite delivery systems and you have an enormous network open to educational programming.
The options open to students are likely to expand exponentially in the years ahead, especially for working adults and place-bound students. This will create both opportunity and problems for policy makers. Students, for example, who already collect credits from three or four or five institutions in their academic career, may be collecting credits from dozens of institutions, compounding the problem of articulation and certification of credit and mastery.
For the most part, states and individual institutions, both public and independent, have taken a "protectionist" attitude about subsidizing providers. While their own state institutions may be engaged in electronic-based distance education, state policy makers and in-state operators are likely to be suspicious of the quality of out-of-state providers and seek through regulation and subsidy policies to limit their access to state residents. In some cases, they may be right. Technology developments may open the door even wider for diploma mills to take advantage of unwary students. But at the same time, these developments hold tremendous potential for extending access to place-bound students and of empowering consumers to seek high quality offerings that meet their needs. It is this tendency that the federal government should support through its own subsidy policies and grant-making activities.
There are a number of ways in which the federal government can promote both mobility of students across state lines and mobility of institutions to operate independent of political boundaries. The federal government should consider:
Building a National Learning Infrastructure: The task of building a "national learning infrastructure" is the task of the 21st century. Free of the paradigms of both teaching and research, such an infrastructure builds upon the emerging global computer and telecommunications networks. It puts learning tools -- both hardware and software -- in the hands of students and not only expands their choices and options but their learning productivity as well.3
The role of the federal government in building such an infrastructure is comparable to its role in supporting and sustaining a research infrastructure for higher education. Through its grant-making agencies it can support and spread the development of learning tools, especially among the "have-not" sectors of higher education. Here are a few examples of how this might be done:
1 In 1991, Michael McPherson and Morton Shapiro, in a book entitled Keeping College Affordable, proposed a series of changes aimed at a similar objective of influencing state tuition setting behavior. Based on the annual instructional cost of an education at a public two-year community college, McPherson and Shapiro proposed a maximum $5,800 grant for needy students. This, they reasoned, would push states to increase dramatically tuition in the public sector in order to fully capture the federal largesse. Their objective was to make the federal government assume greater responsibility for students of need while allowing states to use the additional tuition revenue to enhance institutional support. In contrast, the Super SSIG proposal asks the states to increase their commitment to grant aid only in proportion to increases in college costs. It assumes that the states, not the federal government, will be the primary determinants of affordability. It further assumes that the federal government commitment to grant aid will remain limited in the foreseeable future.
2 These comparisons are taken from data provided by the National Association of Student Financial Aid Administrators and include Pell Grant, SEOG, Federal Work-study, and federal SSIG contributions.
3 This vision of a national learning infrastructure is articulated best in the work of Educom, a national organization concerned with the application of information technology to higher education. See, for example, Heterick (1994), Graves (1994) and Twigg (1994). For more information on the National Learning Infrastructure Initiative (NLII) of Educom, contact NLII@Educom.edu or call the Educom Office, 202-872-4200.