Both in the US and the UW, less college aid = more out-of-staters, less middle-class opportunity

I wanted to draw your attention to a couple of recent reports which tell the same story - cuts in state funding to public universities changes outcomes and leads to less opportunities for in-state students.

The first report I'll talk about is from the National Bureau of Economic Research, which mentions that national research universities like UW-Madison (a member of the Association of American Universities (AAU), as is all but 1 other Big Ten school) don’t suffer as much when state aids are cut, because of its research and donor base. But “non-research universities (which is pretty much any other UW campus outside of Milwaukee) get hurt quite a bit.

At the AAU universities, there is essentially no link between appropriations and instructional expenditures, of which the number of faculty and their salaries is the largest expense, suggesting that there are few adjustments in class size or faculty hiring in response to changes in appropriations. At the other extreme of non-research universities, there is a significant and positive elasticity for instructional expenditures: a 10% decrease in state support ties to a 2.93% decrease in instructional expenditures, implying that the quantity and quality of instruction offered to students varies directly with state appropriations.

One intriguing part of the report has to do with how these public research colleges react to funding cuts at the state level. The NBER says that there is a clear correlation between those cuts and an increasing reliance on foreign and out-of-state students that pay higher tuition.

In addition to tuition price changes, public universities can adjust total tuition revenues by changing the quantity and composition of students. Note that to increase revenue, an institution must add (or substitute) a student for whom the net revenue will exceed marginal cost, leading to an emphasis on recruiting out-of-state domestic and foreign students. The ease (or difficulty) of drawing revenue generating students depends in large part on institutional quality and the overall supply pool. Expansion in demand from abroad, particularly the increased capacity of families in China to pay for a college education, and growth in the college-age population in states where in-state options are limited (Bound, Hershbein, and Long 2009 and Bound, Braga, Khanna, and Turner 2018), generates a potential pool from which universities can expand on the extensive margin….

These changes in tuition revenue are— by construction—the combination of price changes and changes in relative quantities. Focusing on the undergraduate level, the relative importance of price and quantity changes differs for in-state and out-of-state students. For in-state students, price effects dominate, with in-state charges responding markedly to changes in appropriations. As shown in Table A2, the elasticity of in-state price response is -0.265 for the AAU institutions, -0.164 for research universities, and -0.187 for non-research universities. This result is consistent with much of the literature that indicates that appropriation changes have a significant impact on tuition decisions (Baum et al. 2018). Not only is the elasticity somewhat larger at the AAU universities, but the greater baseline levels of in-state tuition for the research-oriented places produce greater changes in the absolute level of in-state tuition at the research universities. A 10% decrease in state appropriations is associated with an $840 increase in tuition at an AAU research university, relative to an increase of about $340 at a broad-access non-research institution. Note that these differences in price responses may well reflect differences in the price elasticity of demand in the respective student markets, as the research universities draw more affluent students who are likely to be less price elastic than students at the broad-access non-research institutions.

Yet, even as in-state charges adjust markedly, out-of-state charges do not move to a significant degree in response to changes in tuition. We interpret this as consistent with a greater price elasticity of demand of out-of-state students who typically have choices which include other out-of-state options of similar quality (both public and private), along with a discounted home-state university option. For public research universities, we also see some adjustments in the composition of students. In the most recent decade, there has been a strong shift to foreign students, particularly among those institutions that are nationally strong but not ranked among the most competitive, while a small number of nationally ranked universities are able to attract domestic out-of-state students. Indeed, this is the focus of Bound, Braga, Khanna, and Turner (2018), who show that public research universities that were disproportionately hurt by state funding declines were more likely to turn to full-fee paying students from abroad. Leveraging variation in state budgetary cycles, the paper examines the sharp rise in undergraduate enrollment, mostly from China, over the period between 1996 and 2012. Instrumental variable estimates highlight that a 10% decrease in state funding was associated with a 16% rise in foreign enrollment at public research universities, with little change in the enrollment mix outside the research sector.

With this as a backdrop, let’s look at how this has worked out in Wisconsin. We’ve had state aid cuts to the UW System since 2011, but we've also had a freeze on in-state undergraduate tuition since 2013. So what has happened to the money available to our System’s schools since then, and has it changed the student body at all?

As you can see from this chart in the Legislative Audit Bureau’s recent report on the University of Wisconsin System, out-of-state tuition revenues have nearly doubled over the last 6 years, which matches the findings from the NBER paper. while tuition paid by Wisconsinites has declined since the tuition freeze was put into effect after 2013.

The LAB noted that the tuition freeze and declining demographics have caused some campuses to change its strategies in enrollment and fincancial management. Because most non-Madison UW schools don’t have a lot of out-of-state students to depend on, that drop in in-state tuition translates into a drop in available tuition revenue on many campuses.

Although tuition revenue increased in 9 of the last 10 years for UW System as a whole, increases did not occur at all UW institutions. As shown in Table 4, since the tuition freeze in FY 2013-14, 9 of 14 UW institutions experienced a decrease in tuition revenue.

Declining tuition revenues have affected UW institutions differently. Some institutions increased nonresident and graduate tuition rates to make up for declining resident enrollment. As noted, in April 2015, UW-Madison phased in a $10,000 increase in the nonresident undergraduate tuition rates over a four-year period. However, some institutions continued to rely primarily on resident undergraduate enrollment to fund operations. Some institutions took measures to improve financial stability, including managing costs and setting aside program revenue balances in anticipation of revenue decreasing. For example, UW-Milwaukee doubled its reserve balance from $4.5 million as of June 30, 2017, to $9.0 million as of June 30, 2018, in order to manage enrollment declines.

Now combine those lower tuition revenues with lower state funding across the UW System, and you can see why lower-enrollment campuses like Superior, Stevens Point, and Milwaukee have had so many problems staying afloat. Those numbers also don’t take into account the struggles that the 2-year Colleges have had in Wisconsin this year, after a ham-handed initiative to merge the Colleges with nearby 4-year schools starting in 2018-19.

In fact, the NBER says that while lower-income students have been able to get enough financial aid to cover their need, that’s not the case for working and middle-class students. And those are the ones that tend to end up in financial distress both in getting to college, and in the years after they graduate.

The overall increase in in-state tuition levels and the increased stratification in pricing structures among public colleges and universities has increased unmet need—that is, cost of attendance not covered by grants or expected family resources—markedly among moderate-income students as well as lowincome students. Comparing students entering public four-year colleges and universities between 2004 and 2016, data from the National Postsecondary Student Aid Study (NPSAS) show that unmet need increased by about $6,800 for dependent students from families in the $48,000–$75,000 income range, with increases of about $5,000 for those with lower incomes. The net effect in the short run is increased borrowing, while recent evidence from Chakrabarti, Gorton, and Lovenheim (2018) suggests that declines in state appropriations have longer-term effects on student debt, car ownership, and homeownership.

The NBER and LAB both show that the anti-UW policies at the state level aren’t doing as much to us crazy hippie liberals in Madison (sorry, outstate WisGOPs), but it is putting a big hurt on the regionalized, smaller UW schools that have more students from in-state, and have more students staying around after they graduate. And the Starve the Beast mentality is putting college further out of reach for working and middle-class students, while not changing then futures of richer students.

In other words, the whole “politics of resentment” strategy that WisGOP has had against the UW for the 2010s is causing more damage to their own constituents instead of the “elites” that they claim they’re trying to injure with these policies.

Which leads me to offer a simple solution - Allow UW-Madison to operate with few strings attached as the special case that it is, and reduce state aids to them while raising it to the other schools. Also, allow Madison to raise its undergraduate tuition, so it doesn’t have to rely so much on Coasties and foreign students paying “full-price”, and boost financial aid for all in-state students that attend UW schools.

If you want to make higher education affordable and to not financially hamstring Wisconsinites after they graduate, this seems like a good way to do it. Which means WisGOP will never go for it, because a high-level UW System that offers more opportunity at a more efrficient cost really isn't in their long-term interests.