Bartik, Timothy J.

Miller-Adams, Michelle

Pittelko, Brian

Timmeney, Bridget F.

English

Upjohn Research

Employment Research Newsletter Volume 28 Number 4 Article 2 10-29-2021 Economic Costs and Benefits of Tuition-Free College in Illinois Timothy J. Bartik W.E. Upjohn Institute for Employment Research, bartik@upjohn.org Michelle Miller-Adams W.E. Upjohn Institute for Employment Research, miller-adams@upjohn.org Brian Pittelko W.E. Upjohn Institute for Employment Research, Pittelko@upjohn.org Bridget F. Timmeney W.E. Upjohn Institute for Employment Research, timmeney@upjohn.org Upjohn Author(s) ORCID Identifier: https://orcid.org/0000-0002-6238-8181 https://orcid.org/0000-0001-6869-9063 Follow this and additional works at: https://research.upjohn.org/empl_research  Part of the Labor Economics Commons Citation Bartik, Timothy J., Michelle Miller-Adams, Brian Pittelko, and Bridget F. Timmeney. 2021. "Economic Costs and Benefits of Tuition-Free College in Illinois." Employment Research 28(4): 4-7. https://doi.org/10.17848/1075-8445.28(4)-2 This title is brought to you by the Upjohn Institute. For more information, please contact repository@upjohn.org.             EMPLOYMENT RESEARCH  • OCTOBER 2021 W.E. UPJOHN INSTITUTE Place-Based Consequencesof Person-Based Transfers severe recessions. On the other hand, programs such as Social Security retirement, Disability Insurance, Medicare, and Medicaid partially insure areas against the longer-term efects of recessions. On average, transfers ofset 25 percent of the decline in earnings in metro areas hit harder by recessions. Furthermore, federal transfers that are nominally person-based provide implicit, persistent, and underappreciated geographic transfers from economically more successful places to economically less successful places. Because the long-run consequences of recessions on local labor markets are not yet widely appreciated, there has been little discussion of whether the existing structure of the social safety net constitutes an appropriate policy response, not just for individuals but for communities as a whole. An important direction for future research is to study how nominally person-based transfers interact with place-based policies, such as economic development block grants and place-based scholarships, in afecting efciency and equity of the overall system of government transfers. One important takeaway from our results is that the most responsive transfer programs in the current system are unlikely to encourage labor supply, skill development, or job creation, which could be essential factors in helping hard-hit metro areas from falling behind economically. Why should states invest in free college for their residents? With returns to college degrees high and most new jobs requiring a postsecondary degree or credential, individual motivations for college-going are easy to discern. As more states create free-college pathways for their residents—and as more will be asked to do so if the Biden administration’s tuition-free college plan becomes law—policymakers should recognize that free college also generates substantial economic and fscal returns for the state. Tis article presents research fndings on the economic and fscal impacts from a hypothetical tuition-free college program in Illinois. Te research was carried out with fnancial support from the Joyce Foundation and the cooperation of the Governor’s Ofce of the State of Illinois. More information on how these fndings were generated can be found in our cost estimate and economic beneftsreports to the state. Economic returns to free college come in the form of higher earnings for workers with degrees and spillover benefts for other residents. Fiscal returns occur when projected tax Reference Hershbein, Brad J., and Bryan A. Stuart. 2020. “Te Enduring Local Harm from Recessions.” Upjohn Institute Policy Brief. Kalamazoo, MI: W.E. Upjohn Institute. https://research.upjohn.org/ up_policybriefs/25/. Brad J. Hershbein is a senior economist andcommunications advisor at the Upjohn Institute. 4 Economic Costs andBenefts of Tuition-FreeCollege in Illinois Timothy J. Bartik, Michelle Miller-Adams, Brian Pittelko, and Bridget Timmeney revenues exceed the cost of a free-college program. Of course, there are many other benefts to increasing educational attainment. Employers have access to a better-trained workforce, which spurs innovation and productivity. Higher educational attainment can also reduce crime and substance abuse, help create more stable families, and lead to better outcomes for the children of college graduates. Tese impacts, however, are hard to quantify, so we focus here on the direct earnings efects for graduates and spillover efects for other residents. For this project, we modeled two versions of tuition-free college: one model covers the community college sector only and the other includes both two-year and four-year public institutions. Both adopt a last-dollar structure in which a student’s Pell Grants are used frst, with the state grant closing any remaining gap in tuition and fees.1 A free-tuition program in Illinois would generate economic and fscal benefts that far exceed its costs, although the fscal benefts would not be realized immediately. Te less ARTICLE HIGHLIGHTS n Free college generates substantial economic and fiscal returns for the state.n The combined two-year and four-year program, run for just the years 2021–2030, would increase Illinois residents’ total earnings by $44.7 billion.n We find that a two-year degree yields earnings gains per individual of between $154,000 and $182,000 over their lifetime, while a four-year degree yields an earnings gain of between $671,000 and $793,000. n We estimate spillover effects on other Illinois residents at 86 percent of the direct effect.                                                                                   EMPLOYMENT RESEARCH  • OCTOBER 2021 W.E. UPJOHN INSTITUTE Table 1  Aggregate Illinois Present Value of Increased Earnings for Tuition Subsidy Programs expensive program covering only two-year college yields positive returns more quickly, but the returns are not as high as they are for the more expansive (and expensive) program. Free college leads to more collegegraduates. Depending on its structure,tuition-free college will lead moreIllinois residents to complete either atwo-year program, earning an associatedegree, or a four-year program, earninga bachelor’s degree. Some of theseadditional graduates will remain in thestate. (Our analysis focused only on thehigher earnings of graduates who remainin the state. Graduates leaving the stateare also better of because of the program,but we are assessing the impact of sucha program on the state and thus do notaccount for benefts to out-migrants.)People with college degrees orcredentials will earn more. Higherdegree completion will signifcantlyincrease graduates’ lifetime earnings.Tis earnings increase is due to thesegraduates’ higher skills. In our analysis,we focus on the earnings efects forIllinois residents ages 25–79 who remainin state for their entire careers. We fndthat a two-year degree yields earningsgains per individual of between $154,000and $182,000 over their lifetime, while afour-year degree yields an earnings gainof between $671,000 and $793,000. Basedon the research literature, we estimatespillover efects on other Illinois residentsat 86 percent of the direct efect.We conclude that the combinedtwo-year and four-year program, runfor just the years 2021–2030, wouldincrease Illinois residents’ total earningson aggregate by $44.7 billion (in 2021dollars; see Table 1). Tis is mostlydue to more Illinois residents earningbachelor’s degrees. Te earnings gainfrom the added bachelor’s degrees is$39.7 billion, versus $5.0 billion from theadded associate degrees. Te greater efectfrom the bachelor’s degrees is due to themuch greater annual earnings efects ofsuch degrees. Te two-year-only tuitionRun from 2021 to 2030  Direct earnings efect on Illinois graduates who stay in Illinois, summed over all graduates considered in cost estimates Spillover earnings increase 2,314,636,375 18,369,993,950 3,728,391,768 for other Illinois workers (86% of direct efect) Total efect 5,006,074,021 39,730,452,031 8,063,731,033 Total efect of combined two-year and four-year program Combined two-year and four-year program Two-year program only Efect in combined program due to two-year degrees ($) 2,691,437,646 44,736,526,052 subsidy program also has considerabletotal earnings benefts. Such a programrun from 2021 through 2030 wouldincrease the present value of Illinoisresidents’ total earnings by $8.1 billion.How does this compare with the costsof operating either of these two tuitionsubsidy programs from 2021 to 2030?Based on our modeling, a last-dollar,community college–only program wouldcost $30 million in its frst year, withannual costs rising to $58 million by theend of the forecast period. A last-dollarprogram covering both two-year andfour-year public in-state institutionswould cost $155 million in its frst year,with annual costs rising to $615 millionEfect in combined Efect in two-year-only program due to four- program due to two-year degrees ($) year degrees ($) 21,360,458,081 4,335,339,265 in 2030. Present value costs and beneftsof the program operated over 10 years,beginning in 2021, are presented inTable 2.Te present value of total earningsbenefts from operating either of thesetwo programs far exceeds their costs.For the combined four-year/two-yearprogram, the present value of totalearnings benefts, at $44.7 billion, isover 11 times the present value of costsof around $4 billion. For the two-year-only program, the present value of totalearnings benefts, at a little over $8 billion,is more than 18 times the present value ofprogram costs of $438 million.Table 2  Aggregate Illinois Present Value Costs and Benefts of Tuition-Free College Programs Run from 2021 to 2030 Combined two-year and Two-year program only four-year program ($) ($) Present value of costs in 2021 dollars 3,978,294,564 438,274,379 Present value of direct and spillover earnings 44,736,526,052 8,063,731,033 benefts for Illinois residents Extra state and local tax revenue (earnings 4,755,492,719 857,174,609 benefts times 10.63%) Extra state tax revenue (earnings benefts 2,451,561,628 441,892,461 times 5.48%) 5 EMPLOYMENT RESEARCH  • OCTOBER 2021 W.E. UPJOHN INSTITUTE Economic Costs and Benefts of Tuition-Free College in Illinois State residents without college degrees will earn more, too. When a larger share of a state’s residents has a college degree, those without a degree Earnings gains for other Illinois residents—those who do not get the higher educational attainment due to the tuition subsidy program—are much greater than program costs. also beneft. Higher wages for educated workers push wages up more generally. A state with more skilled workers will be better able to attract and grow jobs and businesses, which will increase the wages of all the state’s workers. Finally, a state with more skilled workers may develop better amenities, public services, social services, and community well-being, all of which may enhance child development and enhance the long-run earnings of the next generation. Our modeling shows that the earnings gains for other Illinois residents—those who do not get the higher educational attainment due to the tuition subsidy program—are much greater than program costs. For the combined two-year/four-year program, spillover benefts for other workers are over $20 billion, which is far greater than program costs of somewhat less than $4 billion. Similarly, for the tuition subsidies limited to two-year programs, the spillover benefts for other workers are about $4 billion, which far exceeds program costs of a little over $400 million. In response to the question “Why should Illinois residents pay tuition subsidies that directly beneft other Illinois residents?”, one answer is that such subsidies will increase overall earnings of many Illinois workers, not just those who get the tuition support. States will collect more money in taxes than the cost of a free-college program—but not right away. Free-college programs can also be judged by whether their fscal benefts outweigh their costs. Fiscal benefts come from increased tax revenue as workers’ earnings rise. We model these benefts based on conservative assumptions that estimate a lower bound to their value. Figure 1  Annual Costs and Fiscal Benefts of Illinois Combined Two-Year/Four-Year Tuition Subsidy Program  $3,500,000,000 $3,000,000,000 $2,500,000,000 $2,000,000,000 $1,500,000,000 $1,000,000,000 $500,000,000                                                         $0$-2020 2030 2040 2050 2060 2070 2080 2090 2100 Total state and local revenue benefit State revenue only benefit Cost 6 For a combined two-year and four-year program, run from 2021 to 2030,the present value of total state and localrevenue collections will be slightly under$4.8 billion, which exceeds the presentvalue of program costs of around $4.0billion. For the tuition subsidy programfor only two-year degrees, running from2021 to 2030, the present value of stateand local revenue collections will bealmost $860 million, compared to thepresent value of program costs of almost$440 million.Te following fgures show asimulation of annual costs and fscalbenefts for a free-college program thatcontinues indefnitely.As Figure 1 shows, the programstarts out with large annual costs, rapidlyincreasing to around $500 millionper year in 2021 dollars. Annual fscalbenefts are far less because our earningsmeasures do not start counting earningsefects until graduates reach age 25, andeven afer that it takes many years beforegraduates reach their peak earningsyears in their forties and early ffies. As aresult, from a total state and local revenuestandpoint, annual added revenuecollected does not exceed annual tuitionsubsidy program costs until the year 2044,where the state and local revenue linecrosses the cost line. From a state revenueonly line, annual revenue exceeds costs inthe year 2055, where the state revenue linecrosses the cost line. However, in eithercase, on an annual basis, this combinedprogram does eventually generatesufcient revenue that annual revenue forjust the state exceeds program costs.Annual fscal benefts and costs ofa community college–only programfrom 2021 through 2099 are shown inFigure 2. Te fscal results of this morelimited program difer from the morecomprehensive program in two ways.First, the annual costs and benefts aremuch lower, so the short-run net fscalcosts are less, as are the long-run netfscal benefts. Second, the “crossover”year is fve years earlier. For this cheaperprogram, state and local fscal beneftsexceed costs as of 2039, whereas theEMPLOYMENT RESEARCH  • OCTOBER 2021 W.E. UPJOHN INSTITUTE combined two-year and four-year program doesn’t have such benefts exceeding costs until 2044. For state revenue only, this cheaper program has fscal benefts exceeding costs by 2050, compared to 2055 for the more expensive combined program. Overall, in considering these two programs’ economic and fscal benefts versus costs, two things stand out. First, for either tuition subsidy program, the true cost-beneft picture does not emerge until at least 50 years have passed and an entire generation has gained educational degrees and completed their working careers. Educational investments are long-term investments and cannot be evaluated properly without considering very long-run efects. Second, the cheaper, two-year-only program has somewhat higher ratios of benefts to costs, but the combined program has a much higher level of net benefts. In sum, an investment by the state in either a two-year-only or a two-year and four-year combined tuition subsidy program will yield benefts far beyond the costs of either program, although not immediately. Tese benefts result from enhanced earnings by degree recipients and large spillover efects for those without degrees. A sufcient share of this increased income will be paid to Illinois state and local governments, and eventually annual fscal benefts will exceed these tuition subsidy programs’ costs. Figure 2  Annual Costs and Fiscal Benefts of Illinois Two-Year-Only Tuition Subsidy Program                  2020 2030 2040 2050 2060 2070 2080 2090 2100 Total state and local revenue benefit State revenue only benefit Cost  $400,000,000 $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0$-Tere are political challenges toinvesting state resources in a programthat does not yield fscal returns untildecades later; however, the economicbenefts of free college to a state’s workersand employers begin almost immediately.Tis is the grounds on which many stateshave—and more states should—launchtheir free-college efort.Note 1. Tis is not an ideal structure from an equity standpoint because non-Pell-eligible students receive more state funding than Pell-eligible students who may then still struggle to cover the full cost of college attendance; however, it is the dominant model when it comes to statewide free-college programs. Timothy J. Bartik is a senior economist, MichelleMiller-Adams is a senior researcher, Brian Pittelkois Promise research coordinator, and BridgetTimmeney is a senior project consultant, all at theUpjohn Institute. 2021 W.E. Upjohn Institute Dissertation Award Winners WINNER HONORABLE MENTIONS Anna Stansbury Zachary Bleemer Natalia Emanuel Harvard University University of California, Berkeley Harvard University “Essays on Power in Labor Markets” “On the Meritocratic Allocation of “Te Fruits of Our Labor: Essays on Advisors: Lawrence Katz and Higher Education” Work and Its Impacts Lawrence Summers Advisor: David Card Advisor: Lawrence Katz 7 

Economic Costs and Benefits of Tuition-Free College in Illinois

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Economic Costs and Benefits of Tuition-Free College in Illinois

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