Analysis: Dollars Should Follow Scholars into Higher Education: Study

Published June 1, 2006

On March 14, the Phoenix-based Goldwater Institute released a study recommending a portion of state higher education funding in Arizona go directly to students in the form of grants, rather than to public institutions as lump-sum appropriations.

The study, Cash for College: Bringing Free-market Reform to Higher Education (written by the author of this article), contends state-level grants would help expand students’ educational options and improve higher education’s overall efficiency.

Ensuring access to affordable post-secondary education is an especially pressing policy concern for high-growth states such as Arizona, which has three public research universities and 20 community colleges. The state’s universities are projected to see an enrollment increase of 70,000 students through 2020–one of the highest undergraduate enrollment increases in the nation.

In the face of rising tuition and rapidly growing enrollment, policymakers are looking for cost-efficient ways to expand capacity. Using existing capacity at private colleges and universities is an important step toward that goal. The Arizona Commission on Postsecondary Education lists more than 370 private post-secondary institutions offering a wide array of programs, from certifications and associate degrees to undergraduate and graduate degrees.

“Giving each student the ability to direct her share of state education dollars to the institution of her choice empowers her to make the educational decisions that are best for her,” said John Munger, former president of the Arizona Board of Regents. “At the same time, the student’s economic power compels the institutions to compete for her dollars by meeting her educational needs and doing so efficiently. This is far superior to simply providing institutions lump sums and letting the bureaucracy decide what is best for that student.”

Current System Bypasses Students

Enrollment growth at Arizona private post-secondary institutions outpaced the growth of their public counterparts by more than four to one over the past decade. Private institutions in Arizona have also edged past state universities in first-time, full-time freshmen enrollments. Letting students use grants at any college or university of their choice, public or private, would treat private colleges and universities as equal partners in the provision of higher education and improve the overall efficiency of post-secondary education through competition.

Real Student

Currently, public institutions of higher learning are driven by inputs, or funding, not outputs, such as student achievement or graduation rates. As Arizona Republic columnist Robert Robb noted on March 31, “The economics of higher education are out of whack because there is a disconnect between buyers and sellers. Buyers (students) are subsidized. Except for student loans, however, the subsidy isn’t even directed by the buyer. It goes directly to the higher education institution. As a result, institutions of higher education, particularly public ones, don’t have to be as student-focused … That contributes to poor completion rates, a particularly acute problem here in Arizona.”

According to a 2004 report published in the Chronicle of Higher Education, only 48 percent of students attending the state’s post-secondary institutions graduate within six years, “one of the lowest rates in the country.” In addition, data from the National Center for Education Statistics indicate less than 25 percent of first-time, full-time Arizona community college students finish their two-year degree programs in three years.

More money is not the answer. In Going Broke by Degree: Why College Costs so Much (AEI Press 2004), Ohio University economist Richard Vedder finds that nationwide, just 21 cents of every additional inflation-adjusted dollar per student since 1976 was actually spent on undergraduate teaching. Yet from 1976 to 2001, the difference between the rise in tuition and the overall inflation rate increased more than 106 percent at four-year research institutions, and 65 percent at two-year, non-research intuitions, Vedder notes.

Money Is Available

An October 2005 USA Today survey found two of Arizona’s three public universities have led the nation in tuition increases since 2002. The University of Arizona (UA) ranked first with a 74.1 percent increase, and Arizona State University (ASU) ranked fourth with a 70.4 percent increase. This January, both proposed additional tuition hikes for 2006-07–5 percent at UA and nearly 9 percent at ASU.

If recent history is any indication, average in-state tuition could jump from $4,500 to nearly $10,000–roughly a quarter of a typical Arizona family’s annual household income–in just a few years.

Colorado a Model

In 2005, Colorado implemented the country’s first statewide higher education grant system, called the College Opportunity Fund. Colorado no longer makes lump-sum payments to its public institutions for undergraduate education. Instead, funding goes directly to state undergraduates in the form of stipends. Like the federal Pell Grant program, students can use their grants at any in-state college or university they choose, public or private.

In Arizona, state and local lump-sum funding to its 25 public colleges and universities just for operations, which excludes capital and construction expenses, exceeds $1.3 billion annually. That’s enough to give every projected resident student likely to enroll in the state between 2006 and 2018 (nearly 110,000 students) an $8,000 grant annually to attend a four-year institution or a $5,000 annual grant to attend a two-year college.

That would leave intact the $2.4 billion in annual revenue Arizona public institutions currently receive from tuition and fees, and all other revenue, including local, state, and federal grants for capital and special projects as well as private gifts and grants, and endowment and auxiliary revenue.

New Vision Welcome

“Transitioning toward a student-centered funding system for higher education would improve efficiencies in the current system and help address the problem of skyrocketing tuition prices,” said Goldwater Institute Fellow Dan Lips. “This proposal makes sense for students and taxpayers.”

Under the proposed system, students would be responsible for paying tuition and would be required to sign contracts promising to meet the academic standards set by the institutions where they enroll and to repay their grants in full if they drop out of school before completing their degrees.

The study finds that tying operating funding directly to students and indexing grant amounts to inflation would save an estimated $768 million annually over Arizona’s current lump-sum funding system, which isn’t based on student counts or inflation. Having to compete for students also would put powerful pressure on the state’s public and private institutions of higher learning to keep costs and tuition down, lest they risk losing students and their accompanying education dollars.

As Robb summed up in his March 31 column, “So, instead of lobbying legislators, colleges and universities would get their money by competing for students through offers of better learning environments and experiences.”

Vicki Murray, Ph.D. ([email protected]) is an independent education policy researcher based in Paradise Valley, Arizona. She is the former director of the Center for Educational Opportunity at the Goldwater Institute in Phoenix, and author of Cash for College: Bringing Free-market Reform to Higher Education.

For more information …

Cash for College: Bringing Free-market Reform to Higher Education,