Higher Education Finance: Trends, Imperatives and Challenges

1. Higher Education Finance: Trends, Imperatives and Challenges William Zumeta (with assistance from Robin LaSota) University of Washington Association for the Study of Higher Education Annual Conference Vancouver, BC, Canada November 2009

2. Outline • Unfavorable trends in state & local finance of higher education (even before the recent big downturn) • Impacts of these trends on tuition as a source of finance • State fiscal imbalances going forward • Troubling trends and prospects for student aid/borrowing • Why this all matters for the country’s future • What are realistic policy options?

3. Source: T. Mortenson, Presentation to the Council for Opportunity in Education, 9/11/2009

4. State Appropriations and Tuition • According to SHEEO, real state appropriations to higher ed per FTE student in FY 08 were lower than in 1985. • Net tuition revenue (after state student aid) was more than twice as high in constant dollars. Thus, students are now paying about 36% of the total, compared to 23% in 1985. • There are big jumps in the tuition share during economic downturns with only a slight dropoff when appropriations eventually come back. • Total funding per student from these two sources in FY 08 was only about 8.5% above the late 80s peak, in constant dollars.

6. T. Mortenson, Postsecondary Education OPPORTUNITY, February 2008.

7. State Student Aid Trends • In aggregate states have done pretty well in increasing student aid along with tuition. (There appear to be some notable reversals in the current economic cycle however.) • But this is highly uneven – a small number of states provide most of the state student aid money and many do relatively little. • And need-based aid has grown slower than non-need-based aid (mostly “merit” aid), although this also varies a great deal across the states.

8. National Association of State Student Grant and Aid Programs (NASSGAP). (2009). 39th Annual Survey Report on State-Sponsored Student Financial Aid, 2007-2008, p. 4.

9. National Association of State Student Grant and Aid Programs (NASSGAP). (2009). 39th Annual Survey Report on State-Sponsored Student Financial Aid, 2007-2008, p. 4.

10. Looking Forward at State Fiscal Prospects • This is not a pretty picture even beyond the likely effects of the current downturn.

11. Center for Budget and Policy Priorities, “Recession Continues to Batter State Budgets,” October 20, 2009.

12. After stimulus wanes, gaps could approximate 4% of spending, or $70 billion, even under the “Low-Gap” Scenario Source: Don Boyd, Rockefeller Institute of Government, 2009. Courtesy of Dennis Jones and Jane Wellman.

13. After stimulus wanes, gaps could approach 7% of spending or $120 billion under the “High-Gap” scenario Source: Don Boyd, Rockefeller Institute of Government, 2009. Courtesy of Dennis Jones and Jane Wellman.

14. Projected State & Local Budget Surplus (Gap) as a Percent of Revenues, 2016 Source: Don Boyd, Rockefeller Institute of Government, 2009. Courtesy of Dennis Jones and Jane Wellman.

15. Trends in Student Aid • Ideally, student aid can help make college more accessible for students. • The College Board’s 2009 data shows aid growing in constant dollars over time but even their constant dollar series does not take tuition growth fully into account. • And, the bulk of the money available is in the form of repayable loans. • Research shows that low income and underrepresented students, as a group, don’t benefit much from loans. • They resist, or end up with debt but no degree.

16. Ten-Year Trend in Student Aid and Nonfederal Loans per FTE Used to Finance Postsecondary Education Expenses in Constant (2008) Dollars, 1998-99 to 2008-09 Trends in Student Aid, College Board, 2009, p. 3.

17. Growth of Stafford, PLUS and Nonfederal Loan Dollars in Constant (2008) Dollars, 1998-99 to 2008-09 Trends in Student Aid, College Board, 2009, p. 9.

18. Average Debt per Borrower and Average Debt per Bachelor’s Degree Recipient in Constant (2007) Dollars, 2000-01 to 2006-07 Trends in Student Aid, College Board, 2008, p. 11.

19. Distribution of Total Undergraduate Debt by Sector and Type of Degree or Certificate, 2007-08 Trends in Student Aid, College Board, 2009, p. 10.

20. Affordability is clearly suffering • A telling table from Measuring Up 2008 shows clearly how dramatically the net costs of higher education have increased in relation to median incomes in just the last 8 years (and this was before the current recession). • The damage is worst for those who can least afford to pay. • Affordability deterioration is less bad at 2-year colleges but still very serious.

22. If federal aid has been having trouble keeping up with college costs, it will only get worse.

23. Center for Budget and Policy Priorities, September 30, 2009.

24. Why do these trends matter? • Global competition • Demographic shifts • Social equity

25. Percent of Adults with an Associate Degree or Higher by Age Group - U.S., Washington, & Leading OECD Countries Source: OECD, Education at a Glance 2008. Courtesy of Dennis Jones and Jane Wellman.

26. T. Mortensen, Postsecondary Education OPPORTUNITY, November 2008.

27. Fundamental imbalances requiring policy attention • Higher education charges per student rise at unsustainable rates, similar to health care. • Economic cycles exacerbate the problem. • Institutions have little incentive to control costs, there are few rewards internally. • Federal student aid can’t keep pace with historic rates of price increase.

28. Fundamental imbalances • Historical disconnects across early childhood, K-12, and postsecondary education systems undermine efficiency and output. W/o altered incentives, institutions naturally do what they’ve always done. • States have weak political incentives to overcome these challenges and they cope by cutting higher ed budgets in recessions, being soft on tuition hikes, and asking the feds to increase aid and loan limits. • Many states are also soft on mission creep and program duplication and don’t push hard for strategic efficiencies.

29. Elements of a more strategic Policy and Finance approach • Federal leadership and incentives that promote efficient production of more degreed graduates and reinforce state efforts are needed. • States need to provide thoughtful incentives for efficiency (including better K-12 to PS linkages and 2-year/4-year PS linkages) and quality. • Investments in distance learning and technology-based course restructuring are clearly needed. • Strategic mission controls & enforcement by states are needed, reinforced by federal policies, e.g., R&D funding. • Policy-driven tuition rates and a focus on need-based student aid are critical given the demographic shifts. Also, other student supports are needed.

30. A More Strategic approach • State funding, tuition policy and student aid policy need to be aligned. • Broad, credible accountability mechanisms are needed that increase trust of major HE constituencies. This could shake loose more dollars for investments. • Better financial buffers allowing states and institutions to build and retain reserves are essential. • Don’t ignore potential of private higher education where it exists. But for-profits require more regulation and can be hard to rein in given political influence. • All this calls for state and federal awareness and policy leadership that have been lacking.