Selected SLC Research


Policy Analysis | April 27, 2012

Tuition Deregulation in Higher Education

Jonathan Watts Hull

Higher Education Appropriations and Tuition

Across the country, state support for public colleges and universities was cut significantly during the recent economic downturn. Even as state revenues return to their pre-recessionary levels, economic shifts and deferred expenditures in a range of areas continue to dampen appropriations for higher education in many states. Between 2006 and 2011, per full-time student state support for post-secondary education dropped an average of 10.4 percent regionally, slightly less than the national decline of 12.5 percent. Economic pressures and budgetary demands in some states in the region resulted in reductions in state support for higher education by more than 20 percent over that five-year period.

Higher education is in a unique position with respect to funding, however, insofar as losses in state support often can be replaced by increased revenue from tuition. This period of sustained reduction in state support has resulted in an overall average increase in tuition per full-time student rising regionally by 11.2 percent and nationally by 15.8 percent. The divergent trends between state support and tuition revenue have increased the share of revenue from tuition from 36.6 percent regionally in 2006, to 41.9 percent in 2011. At the national level, the increase was slightly greater, rising from the same point (36.6 percent) in 2006, to 43.3 percent in 2011.

The table below illustrates some of these trends.

State State appropriations per

full time equivalent student

Tuition per

full time equivalent student

Percent

revenue from tuition

FY2006

FY2011

% change

FY2006

FY2011

% change

2006

2011

Alabama

$7,126 $5,991 -15.9% 6,358 7,428 16.8% 48.5% 57.6%
Arkansas

$7,992 $7,086 -11.3% 4,122 4,977 20.7% 35.9% 44.2%
Florida

$7,849 $5,810 -26.0% 2,467 2,838 15.0% 23.9% 32.8%
Georgia

$9,315 $7,186 -22.9% 1,979 2,423 22.4% 17.6% 25.3%
Kentucky

$8,434 $7,206 -14.6% 4,330 5,591 29.1% 33.9% 43.7%
Louisiana

$6,817 $7,309 7.2% 3,273 2,683 -18.0% 32.4% 26.9%
Mississippi

$7,017 $6,820 -2.8% 4,272 4,910 14.9% 37.8% 41.9%
Missouri

$6,629 $5,701 -14.0% 4,605 4,941 7.3% 41.0% 46.4%
North Carolina

$9,054 $9,463 4.5% 3,134 2,801 -10.6% 25.7% 22.8%
Oklahoma

$7,618 $7,613 -0.1% 3,798 4,355 14.7% 33.3% 36.4%
South Carolina

$7,054 $4,811 -31.8% 6,483 6,262 -3.4% 50.3% 59.8%
Tennessee

$7,741 $6,828 -11.8% 4,259 4,363 2.4% 35.9% 39.5%
Texas

$8,303 $7,904 -4.8% 3,950 4,752 20.3% 32.3% 37.5%
Virginia

$5,879 $5,229 -11.1% 5,319 6,434 21.0% 47.5% 55.5%
West Virginia

$5,371 $5,527 2.9% 4,979 5,664 13.8% 51.8% 53.9%
SLC

$7,480 $6,699 -10.4% 4,222 4,695 11.2% 36.6% 41.9%
US

$7,192 $6,290 -12.5% 4,123 4,774 15.8% 36.6% 43.3%

Source: State Higher Education Finance, FY2011, State Higher Education Executive Officers, Boulder, Colorado, March 2012.

The authority to set tuition varies from state to state. Most states provide for statewide coordinating or governing boards to establish tuition, either for all multiple (community/technical/4-year) systems or individual systems. A few states provide individual institutions with the authority to establish tuition rates, and three vest authority for setting tuition in the legislature. The method for tuition setting in Southern states is listed below.

State

Legislature

Coordinating/

Governing Board

Institution

Alabama

X

Arkansas

X

Florida

X

Georgia

X (individual systems)

Kentucky

X (multiple systems)

Louisiana

X

Mississippi

X (individual systems)

Missouri

X

North Carolina

X (multiple systems)

Oklahoma

X (multiple systems)

South Carolina

X

Tennessee

X (individual systems)

Texas

X (individual systems)

Virginia

X

West Virginia

X (individual systems)

While this table reflects the final authority for setting tuition, it should be noted that governors, governing boards, legislatures and individual institutions all play a role in establishing tuition levels, both in by advising the process as well as adjusting or responding to appropriations from the public treasury.

Tuition Deregulation

Lately, the cost of higher education has been hotly contested. Reports of student loan debt, concerns about diminishing access, and rising calls for controls on tuition. At the same time, several states are considering steps to establish variable tuition for institutions, essentially deregulating the tuition process.

The concept is not entirely new. In 2003, Texas deregulated tuition to allow public universities to set designated tuition rates at different levels. The designated tuition rate is the supplemental amount these universities can charge above the statutorily established base tuition rate (base tuition is the uniform, statutorily set amount all universities charge). Prior to 2003, all tuition, base and designated, was established by the Legislature. In exchange for tuition flexibility, institutions were to meet specific performance criteria, including graduation and retention rate targets, educational quality, diversity, affordability measures, and financial assistance availability.

In 2005, Virginia took a three-tiered approach with the Restructured Higher Education Financial and Administrative Operations Act, which established varying levels of autonomy for public institutions of higher education in exchange for meeting performance targets. Four institutions in the state are Level III institutions, which affords them autonomy not just over tuition, but capital outlay, human resources, and finance, among other areas. In exchange, institutions agree to meet defined performance goals, including a commitment that tuition levels do not constitute a barrier to access, which has meant a renewed commitment to financial grant aid and debt cap for some students. Tuition has risen in the Commonwealth 10 percent over the past decade, and this year Virginia's Governor Bob McDonnell has made overtures, asking schools to limit tuition increases.

In 2007, Florida established a deregulated model similar to Texas', with five institutions allowed to levy a differential tuition fee initially to pay for undergraduate academic expenses in exchange for meeting specific productivity targets. By 2009 this model was extended to all public universities, with the added requirement that they spend 70 percent of the fee on undergraduate programs and the rest on undergraduate financial aid. Tuition increases are held in check by several mechanisms, including limits on annual increases in both base and differential tuition as well as an absolute cap at the average of four-year public institutions nationally.

Legislation proposed this year in Florida would allow schools meeting 11 of 14 criteria (at this writing, the University of Florida and Florida State University) to set tuition at "market rates," essentially lifting any limitations. Florida Governor Scott, for his part, has cautioned schools that they need to demonstrate that they have made significant savings already and that they are producing graduates in majors that the state needs. While the governor cannot directly block tuition increases, 14 of the 17 members of the board of governors, which must approve tuition rates, are gubernatorial appointees.

Florida is not alone in seeking changes this year. The Louisiana House has approved a proposal to alter the state's constitution to permit institutions to increase fees or tuition. Currently, the Legislature is charged with this responsibility, and must approve tuition and fee increases by a two-thirds majority vote. Louisiana, which is alone in the region in having its Legislature approve tuition increases, is hoping the move will provide public institutions the flexibility to increase tuition revenue to offset declining state appropriations to remain competitive with other institutions. States outside the region, including Colorado, Washington, New York, among others, have considered or implemented some form of tuition flexibility in recent years, particularly for flagship public universities.

The Policy Context

Public colleges and universities receive state support because they serve a broader public purpose. States benefit in myriad ways from the activities of their institutions of higher education, including through a more highly skilled workforce, increased innovation and job creation, and general economic development. Colleges of medicine, agriculture, public health and education provide a vital pipeline for skilled workers into the workforce to accomplish necessary and vital activities. Florida Governor Scott's comments on tuition increases highlight the tension inherent in tuition flexibility: state support subsidizes higher education in order to achieve public policy ends. For this reason, states demand specific productivity measures in exchange for this flexibility. Moving forward, the next horizon is likely to be expectations that colleges and universities produce graduates in specific programs and majors more needed or desired by the state.

Differential Tuition

Beyond simply varying tuition by institution, colleges and universities are experimenting with varying costs for courses or degrees. Differential tuition establishes higher costs to students for either more costly majors or for courses that are more popular (essentially congestion pricing for courses). Differential tuition is increasingly popular according to research from the Cornell Higher Education Research Institute. In 2010, according to the Institute, 143 public colleges and universities that offered bachelor's degrees had some form of differential tuition, which is essentially one in five, with this practice being pursued at over half of all institutions offering doctoral degrees. Differential tuition can take the form of either higher tuition by major or by year of enrollment, in both instances to recover the higher costs associated with specific programs or the smaller courses for upperclassmen.

Differential tuition is only just beginning to be seen at the community college level. In March, Santa Monica Community College announced that it would begin charging more for high-demand courses. While the proposal was eventually shelved by the College's Board of Trustees, other institutions are moving ahead with similar plans, including the Lone Star College System in Texas and Pima Community College in Arizona.

While differential tuition provides institutions with an opportunity to realize revenue to cover the expenses of courses with higher costs and capitalize on high-demand majors, in practice it poses a significant policy challenge for states. The highest cost programs may very well be those that the state needs to promote in order to develop a qualified workforce (think: engineering and science). If institutions use the autonomy granted them by states to set tuition, they could increase the costs for specific majors to such an extent that it establishes barriers to entry and disincentives to persistence that in the end operate contrary to public interests.