State Education Subsidies Shift Students to Public Universities

If state subsidies were instead given directly to students as portable grants or vouchers that could be applied to any in-state college, total enrollment would remain approximately the same overall but an estimated 29 percent fewer students would choose public four-year colleges. Most would shift to private four-year schools.

In 2002, states spent about $66 billion on higher education subsidies, a substantial fraction of the $289 billion spent on U.S. post-secondary education. According to the National Center for Education Statistics, U.S. post-secondary expenditures were $19,220 per student, the highest in the world.

Rather than giving aid directly to individuals to use at the college of their choice, states historically have subsidized tuition for in-state students at public colleges and universities by giving operational funds directly to the schools. As a result, in 2002, the average list price for four-year private colleges was $18,273 while it was only $4,081 for in-state students at four-year public colleges. Because colleges vary in their instructional resources, the question of whether the price gap created by the state subsidies affects enrollment decisions is an important one.

In Does the Format of a Financial Aid Program Matter? The Effect of State In-Kind Tuition Subsidies (NBER Working Paper No. 9720), author Bridget Terry Long uses several data sources from the early 1990s to examine how changing the structure of state aid might alter student undergraduate enrollment decisions. She finds that expenditures, the student-faculty ratio, and the percent of faculty with a Ph.D. degree positively affect the likelihood of attendance at a particular school. Higher tuition and distance from home have negative effects on the probability of enrollment. The quality of the other students also matters. For every 10 points that an individual's SAT score exceeds the average at a particular college, his likelihood of enrolling falls 29 percent.

Long finds that the current regime of state subsidies primarily increases enrollment at public four-year colleges. If state subsidies were instead given directly to students as portable grants or vouchers that could be applied to any in-state college, total enrollment would remain approximately the same overall but an estimated 29 percent fewer students would choose public four-year colleges. Most would shift to private four-year schools.

-- Linda Gorman