State Shortfalls and Foreign Students

As state spending for public universities goes down, international student enrollment goes up. A newly published working paper seeks to quantify this relationship, estimating that for the period between 1996 and 2012, a 10 percent reduction in state appropriations was associated with a 12 percent increase in international undergraduate enrollment at public research universities -- and a 17 percent increase at the most research-intensive public universities, the flagships and other institutions that are members of the exclusive Association of American Universities.

The paper, available for $5 from the National Bureau of Economic Research and authored by John Bound, Breno Braga, Gaurav Khanna and Sarah Turner, concludes that expanding foreign undergraduate enrollment “is an important channel through which public research universities buffer changes in state appropriations. While additional revenue from in-state tuition increases appears [to] recoup a large fraction of the fall in appropriations, research universities would have had to navigate reductions in resources per student or yet larger increases in in-state tuition in the absence of the large pool of foreign students.”

The paper, titled "A Passage to America: University Funding and International Students," begins by identifying economic and educational capacity-related reasons for dramatic growth in this pool of international students, particularly from China, over the past decade. The authors cite data from the Institute of International Education’s Open Doors survey showing that number of international undergraduates from China has increased from about 8,000 in the academic year 2004-5 to more than 110,000 in 2013-14, with Chinese students accounting for about 90 percent of all growth in foreign undergraduates in the U.S. over this period.

Several factors drove this increase. First, there's been an increase in the number of Chinese families who can afford the costs of American higher education. The authors estimate that the percentage of Chinese families who have incomes higher than the average cost of out-of-state tuition and room and board at an American public university has grown “exponentially” from less than 0.005 percent in 2000 to more than 2 percent in 2013.

Second, high school enrollment has expanded in China, from 63.8 million students to 95 million between 1996 and 2012, according to United Nations Educational, Scientific and Cultural Organization figures. And third, China’s own higher education capacity is comparatively small: the authors note that while China has about four times the population of the U.S., it has fewer than half the number of universities.

At the same time foreign demand for American higher education was growing, state support for public institutions was falling. The authors cite data from the State Higher Education Executive Officers showing a decline in total state appropriations from $89.7 billion in the 2007-8 academic year to $74.8 billion in 2011-12. State funding per full-time equivalent student has fallen from about $12,000 in the mid-1980s to less than $7,000, and the proportion of university revenues coming from tuition (as opposed to state appropriations) has risen accordingly.

The authors hypothesized that public research universities have turned to the growing pool of out-of-state-tuition-paying foreign undergraduates as a way to offset some of the declines in state funding. While they found this to be broadly the case, they also documented differences among various types of public institutions. They found that the link between foreign enrollment increases and state funding decreases was strongest at those public institutions that haven't historically enrolled large numbers of domestic out-of-state students, and was virtually nonexistent at nonresearch public universities that have limited international appeal.

“While the basic negative relationship [between state appropriations and foreign enrollments] for public universities is clear, there is also a significant amount of heterogeneity,” the authors write. “For instance, for the same state-level budgetary shock, Michigan State significantly increased foreign enrollment, while the University of Michigan did not. One reason is that the University of Michigan consistently attracts well-qualified domestic out-of-state students (around 30 percent of total freshmen), whereas MSU does not (only 10 percent of total freshmen).”

“Overall, these findings are consistent with our underlying hypothesis and conceptual framework: when state appropriations decline, public universities are more likely to admit foreign students because the marginal benefit of adding foreign students (and associated tuition revenues) increases. For nonresearch colleges and universities … we continue to estimate essentially no link between changes in state appropriations and foreign student enrollment, which is consistent with the expectation that nonresearch universities tend to be more locally focused than the research universities, and have limited capacity to attract foreign students.”

As for the question of whether foreign students are crowding out domestic students, the authors note that this is a complex question and that declines in state appropriations affect in-state tuition rates. “Thus any correlational relationship between foreign enrollment and in-state enrollment represents the net effect of changes in tuition charges, institutional resources and other unobserved factors as well as the direct effect of foreign students,” the authors write. “With these limitations in mind … we show a negative association between the number of foreign students enrolled and the number of in-state students enrolled in research and AAU universities. Two additional foreign students are associated with one less in-state student. While these estimates should not be interpreted as causal, our model suggests that crowd-out effects can occur even when university administrators care only about the quantity and quality of the education in-state residents obtain.”

"It would be naïve to say that there isn’t a margin on which additional students from one group don’t impact the enrollment of students from another group, particularly when universities face capacity constraints," said Sarah Turner, one of the authors of the paper and a university professor of economics and education at the University of Virginia. "That would be naïve, but it would also be incorrect to say that we can interpret any evidence that we have as causal estimates of crowd-out. That is, what is going on is really more complicated in terms of student choices. If you’re in California, you are a student who’s has seen the sticker price at University of California, Berkeley, increase … we would expect that that tuition increase also has an impact on student enrollment decisions."

Over all, the authors found that increases in in-state tuition accounted for about 69 percent of the changes in tuition revenue from 2007 to 2012 at public AAU member institutions, while increased recruitment of foreign undergraduates accounted for 17.4 percent of the change. At a few institutions -- Ohio State and Purdue Universities and the University of Minnesota -- the proportion of the change in tuition revenue attributable to foreign student increases was about 40 percent or higher.

“If you are president of a public institution, when you face these appropriation cuts you have essentially three options," said Turner. "You can cut resources per student, which is not something that any university leader wants to do. You can make efforts to raise tuition. There are obvious downsides to that, and for any institution there’s a limit to how much they can raise out-of-state tuition because it’s a function of market forces, so it’s in-state tuition that would increase. Or you can expand the pool of students who are paying the out-of-state price."

"A very small number of universities have a capacity to draw in sizable numbers of domestic out-of-state students," Turner said. But for the rest, she said, increasing international enrollment "is one tool that our paper shows they have been able to use to try to reduce the impact of the cuts on state appropriations. You can think of this as potentially benefiting all the students."