[Excerpt] Outline of a presentation to be made to the American Enterprise Institute Conference on “Higher Education After the Spelling Commission: An Assessment” in Washington DC, March 13, 2007

Ehrenberg, Ronald G

English

[Excerpt] Outline of a presentation to be made to the American Enterprise Institute Conference on “Higher Education After the Spelling Commission: An Assessment” in Washington DC, March 13, 2007.cheri_wp99.pdf: 729 downloads, before Oct. 1, 2020

Ehrenberg, Ronald G.

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The Future of Government Financing of Higher Education

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3-8-2007 
The Future of Government Financing of Higher Education 
Ronald G. Ehrenberg 
Cornell University, rge2@cornell.edu 
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The Future of Government Financing of Higher Education 
Abstract 
[Excerpt] Outline of a presentation to be made to the American Enterprise Institute Conference on “Higher 
Education After the Spelling Commission: An Assessment” in Washington DC, March 13, 2007. 
Keywords 
higher education, Spelling Commission, public policy, funding 
Comments 
Suggested Citation 
Ehrenberg, R.G. (2007). The future of government financing of higher education [Electronic version]. 
Retrieved [insert date], from Cornell University, School of Industrial and Labor Relations site: 
http://digitalcommons.ilr.cornell.edu/workingpapers/142/ 
Required Publisher Statement 
Published by the Cornell Higher Education Research Institute, Cornell University. 
This article is available at DigitalCommons@ILR: https://digitalcommons.ilr.cornell.edu/workingpapers/142 
Revised Draft  
March 8, 2007 
 
 
 
 
 
 
 
 
The Future of Government Financing of Higher Education 
 
 
 
 
 
 
by 
 
 
 
 
Ronald G. Ehrenberg* 
 
 
 
 
(Outline of a Presentation to be made to the American Enterprise Institute 
Conference on “Higher Education After the Spelling Commission: An Assessment” 
Washington DC, March 13, 2007) 
 
 
 
 
 
 
 
* Ronald G. Ehrenberg is the Irving M. Ives Professor of Industrial and Labor 
Relations and Economics and a Stephen H. Weiss Presidential Fellow at Cornell 
University, Director of the Cornell Higher Education Research Institute (CHERI), 
and an elected member of Cornell University Board of Trustees. CHERI is 
supported by the Andrew W. Mellon Foundation, the Atlantic Philanthropies (USA) 
Inc, and the TIAA-CREF Institute. The views expressed here are strictly his own. A 
list of his writings that elaborate on the points made in the presentation is attached 
at the end of the outline. 
 
 
The Future of Government Financing of Higher Education 
 
by 
 
Ronald G. Ehrenberg 
 
 
I. Some Important Objectives 
A. Improve Access and Persistence 
1. U.S. no longer leads the world in college completion rates – a serious 
problem in a knowledge based economy 
2. Inequality in college access rates by income class have barely narrowed 
over the last 25 to 30 years; inequality in college completion rates have 
narrowed even less 
3. Groups in the population that are growing the most rapidly are those that 
have historically been under represented in higher education 
B. Improve and Maintain Higher Education Quality 
C. Remember that higher education is much more than undergraduate 
education (not emphasized by the Spelling Commission) 
1. Importance of scientific research for innovation and economic growth 
2. Importance of graduate education for the production of scientific 
research and the next generation of American PhDs 
3. Role of land grant universities and public higher education more 
generally in improving the welfare of the nation at large 
 
II. Government Financing of Private Higher Education 
A. Primary federal role has been financial assistance to students (grant aid, 
loans, work study, and tax credits) and support for research.1 State 
programs often provide financial support for students enrolled in private 
higher education institutions and in some states (such as NY), direct 
support to private higher education for educating in-state students or for 
capital facilities 
B. There are enormous federal, state, and local tax subsidies in the form of 
tax deductions for contributions to these institutions, exemption of their 
endowment income from taxation, exemption from local property taxes, 
and their eligibility to issue tax exempt bonds.  
C. For over a century tuition has risen at these institutions, on average, by 2 
to 3.5% a year more than the rate of inflation. The factors that have led to 
this are discussed in my book Tuition Rising; they include the failure of 
faculty productivity in teaching to grow (explain), the quest by institutions 
to be the best that they can in every dimension of their activities (which 
has led to an arms race of spending), the widening distribution of earnings 
in the U.S which creates pressure for students to “buy the best” and 
                                                 
1 My discussion of federal financial aid programs will be brief because Sandy Baum from the College 
Board will be discussing these in her presentation today 
 1
increases the demand for positions at selective private institutions (thereby 
reducing any competitive pressures to keep tuition down), the USNWR 
rankings, the belief by many that high tuition levels reflect high quality, 
pressure from external actors (alumni, historic preservationists, the 
environmental movement, and local governments) and the system of 
shared governance. However, the tuition increases overstate the increase 
in the costs faced by students because tuition discounting is prevalent. 
NACUBO surveys suggest that the typical private college or university 
gives back 30 to 40% of its tuition revenue in the form of grant aid to 
undergraduate students. Increasingly this grant aid is ‘merit based”, as 
institutions use grant aid to “craft their classes” (very few institutions, 
such as my own, provide only need based aid).  
D. At the same time that tuition levels have continued to soar, the endowment 
levels at the richest private colleges and universities have also soared. 
E. Why should policy makers care? No one is forced to attend selective 
private colleges and universities. The answer, as I have indicated above, is 
that taxpayers as a whole are subsidizing these institutions because of all 
the favorable tax treatment they receive and therefore the institutions are 
expected to act in the public interest. However, to justify this treatment, 
they have to remain accessible to students from all family income levels; 
currently the proportion of Pell Grant recipients at many of them is far 
below the share of Pell Grant recipients in the college student population. 
F. The wealthiest privates have understood the situation and have embarked 
on programs to enhance their enrollment of students from disadvantaged 
backgrounds- drastically increasing financial aid packages, searching out 
these students, and providing enhanced support services for those who 
enroll. However, more generally private higher education’s feet should be 
held to the fire and private higher education institutions should be held 
accountable for the tax benefits that they receive. 
 
III. Government Funding of Undergraduate Public Higher Education 
A. Over the last 25 to 30 years tuition has risen more in percentage terms in 
public higher education institutions than it has at private higher education 
institutions. But the dollar increases have been smaller at the publics than 
at the privates so in real terms the gap in tuition between private and 
public higher education has increased. 
B. Tuition increases in public higher education have been driven largely by 
the failure of state support per student to grow much in real terms over the 
period –it has been essentially flat if one uses the HEPI rather than the 
CPI. Financial problems faced by state governments, which I have 
elaborated upon elsewhere, make it unlikely that state support for public 
higher education will increase substantially in the future. 
C. As a result, expenditures per student have fallen in public higher education 
relative to expenditures per student in private higher education, leading to 
declining relative salaries of faculty in public higher education (which 
makes it difficult to attract and retain top faculty) and to an increased use 
 2
of part-time and full-time non tenure track faculty. Research shows that 
the latter is associated with reductions in graduation rates, with the largest 
impacts at the four-year comprehensive publics; there is no such thing as a 
free lunch. 
D. Educational expenditures per student vary widely across types of public 
higher education institution; they are larger at the flagship doctoral 
institutions than at the masters’ institutions and larger at the masters’ 
institutions than at the community colleges. Conversely, the proportion of 
students who are Pell Grant recipients are larger at the community 
colleges than they are at the masters’ level institutions and larger at the 
masters’ institutions than they are at the doctoral institutions. So students 
from lower income families are more likely to attend lower expenditure 
per student institutions. Considerable research shows that higher 
expenditures per student are associated with higher post college earnings, 
other factors held constant, so on balance the income gain students get 
from attending college is correlated with their initial family incomes. 
E. The disparity in expenditures per student received by students from 
different family income levels is amplified by the changing distribution of 
state financial aid programs. State financial aid programs are increasingly 
merit (such as the Georgia Hope Scholarship program) rather than needs 
based. Federal financial aid policies have also shifted away from grant aid 
for low income students to subsidized loans and tax credits; the latter 
benefit primarily middle and upper middle income students rather than 
lower income students. 
F. The privatization of public higher education (moving towards further 
reductions in state support and allowing public institutions, among other 
things more freedom in tuition setting) is most likely to be successful at 
the flagship publics, which have the market demand that will allow them 
to raise tuition and have the ability to raise substantial endowments and 
large annual giving streams. The public comprehensives and the 
community colleges are less likely to be able to pull this off and 
privatization of these institutions will likely price some students, primarily 
lower income students, out of college. 
G. The transition from community colleges, where many low income students 
begin their education, to four-year colleges is often not seamless and 
hinders, their progression to four year degrees 
H. The states and public higher education institutions have responded to these 
pressures in a variety of ways – because public higher education is 
governed separately by state, forms of natural experiments arise. Among 
the responses 
1. Programs at a number of our nations’ flagship public institutions that 
mimic (or were mimicked by) the programs being developed at the 
selective private institutions- examples are Access UVA, the Carolina 
Covenant, and the Texas Longhorn Opportunity Scholarship Program- to 
increase the access and persistence of students from under represented 
groups 
 3
2. The provision of vouchers to students, rather than direct state support for 
public higher education institutions; these vouchers can be used at any 
public or private institution in the state (Colorado) 
3. An agreement that is about be enacted into law that graduates of 
community colleges in Virginia from lower income families can attend 
the University of Virginia and still pay much lower community college 
tuition rates. 
4. Movement to a uniform high undergraduate tuition policy with state 
residents receiving grant aid at least equal to the state appropriation per 
student that the university receives (Miami University of Ohio) 
5. More freedom for public higher education institutions to raise their tuition 
and be freed of other state restrictions (human resource policies, 
procurement policies, capital construction policies) that reduce their 
ability to compete with their private sector counterparts in return for 
meeting state goals (Virginia) 
6. A number of states have programs offering additional scholarships, or 
loan forgiveness programs, for students who work in the state for a 
number of years after graduation in fields that the state judges to be 
socially important (nursing, teaching, social work). Just as our nation’s 
most selective private law schools have developed similar programs for 
their graduates who work in the public interest law area, private higher 
education institutions might similarly develop programs to encourage 
their graduates to work in lower paying socially important fields. 
 
 
IV. Other Policy Issues Relating to Financing Higher Education 
A. How the federal government finances Medicaid and the Pell Grant 
program is asymmetrical. When states spend more on Medicaid, they get 
more federal matching funds. In contrast, when states spend less on their 
public higher education systems and public higher education institutions 
respond by raising their tuition levels, the higher tuition levels increase the 
amount of Pell Grant funding that residents of the state are eligible for 
(Pell Grants are limited by the tuition levels students pay). Thus states get 
more federal funds if they increase Medicaid funding but less federal 
funds if they increase state funding (which allows public tuitions to be 
kept low). The Federal financial aid system should be restructured in a 
way that encourages states to spend more, rather than less on public higher 
education. The recently passed “Pell Grant Equity Act”, (HR990) is a step 
in the right direction. 
B. If increasing the enrollment and persistence of students from lower income 
families is a serious policy goal, federal and state funding should support 
this objective. State funding to an institution might have a component 
based upon the share of students enrolled from lower income families. 
Federal funding through programs such at the SEOG should similarly be 
based upon these shares, not on historical entitlements. Federal and state 
funding should also provide additional funding to both public and private 
 4
institutions for graduating students from lower income families. As a 
model, the Bundy aid program in NYS provides grants to private colleges 
and universities in NYS for each state resident that the graduate. A 
program of this type that provided extra funding for graduating Pell Grant 
recipients would provide the proper incentive for institutions to behave in 
the public interest. 
C. Research suggests that the social return to college education is larger than 
the private return. For example, a number of careful studies show that non 
college graduates earnings are higher in areas in which more college 
graduates are present and in firms that employ a greater share of college 
graduates. Richard Vedder has presented evidence that at first glance 
appears to be to the contrary; states that spend more on public higher 
education do not see faster growths of income than states that spend less. 
If this evidence is correct, a reason may be that college graduates are 
mobile and can migrate to wherever income earning opportunities are best. 
So some states, including many located in the Midwest, see large 
percentages of their college graduates moving out of state. This provides 
an incentive for these states to spend less on public higher education than 
is socially optimal. To the extent that we as a nation benefit from a more 
highly educated workforce, this provides a strong rationale for more 
federal investments in higher education, either directly through student aid 
or indirectly through incentives funding provided to public and private 
higher education institutions. 
D. Public higher education is more than undergraduate education. Cut backs 
in state funding for public higher education threaten the quality of 
graduate education and research as well as the scope of extension 
activities. Research shows that graduate students in the sciences and 
engineering contribute to research and that research is associated with 
innovation and increased economic growth in an area. However, because 
PhDs are even more mobile than undergraduates, states have an incentive 
to under invest in graduate education. The case for more federal funding 
for graduate education (such as that proposed in recent House legislation) 
is strong. 
E. More and more public higher education is viewed as a vehicle for 
economic development by public policy makers and state funding to 
public higher education systems often comes in the form of support for 
research infrastructure rather than support for the core budgets of the 
institutions. This puts further pressure on the quality of undergraduate 
education at these institutions. 
 
 
 
 
 
Selected References 
 5
1. Ronald G. Ehrenberg,  Tuition Rising :Why College Costs So Much (Harvard 
University Press, paperback, 2002 
2. Ronald G. Ehrenberg, Governing Academia (Cornell University Press, paperback, 
2005) 
3. Ronald G. Ehrenberg, “Graduate Education, Innovation, and Federal 
Responsibility”, Communicator 38 (July 2005) 
4. Ronald G. Ehrenberg, “The Perfect Storm and the Privatization of Public Higher 
Education”, Change (January/February 2006) 
5. Ronald G. Ehrenberg ed. What’s Happening to Public Higher Education 
(Greenwood Press, 2006) 
6. Ronald G. Ehrenberg, “More Than Fiduciary Duties”, Insidehighered.com 
(August 17, 2006) 
7. Ronald G. Ehrenberg, “Reducing Inequality in Higher Education: Where Do We 
Go From Here” in Stacy Dickert-Conlin and Ross Rubenstein eds. Economic 
Inequality and Higher Education (Russell Sage Foundation, Spring 2007) 
 
 6


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