Other People’s Money

Questions of fairness have always permeated discussions about admissions and financial aid.

Is it fair to consider financial status in admissions? Is it fair for colleges to admit students who can’t pay? Is it fair to charge students different rates for the same class?

A new fairness debate has cropped up in several states this year and is beginning to change policy in Iowa.

Last month, the Board of Regents of the State of Iowa, which oversees the University of Iowa, Iowa State University, and the University of Northern Iowa, eliminated their policy of earmarking 20 percent of in-state tuition revenue for financial aid purposes. In doing so, the board launched a plan to reduce the sticker price of attending the three universities by $1,000 a year. The tuition cut would be contingent on an increase in funding for the universities and for a new state need-based grant program.

The move puts Iowa at the forefront of this emerging policy debate that higher-education researchers say has been decades in the making: whether it is fair for public colleges and universities to earmark tuition revenue from high- and middle-income students for the purpose of supporting low-income students.

Such policies, used widely by private universities, evolved at public universities over the past few decades as a way to ensure institutional objectives – enrolling both low-income students and high-achieving students – when institutions saw the distributed decision-making framework responsible for funding and providing access break down. The universities in Iowa, which is the only state not to have a state-funded grant program for students at public universities, began the process in the 1980s.

These institutional aid policies are now under scrutiny, particularly because they’re viewed as driving up the cost that middle-class and wealthy students must pay, an assertion that one can argue is both true and not.

“We’re piling the costs of financial aid -- which used to be thought of, in the public sector at least, as a public responsibility -- onto students, and we ought to be stopping and thinking whether that’s the best thing to do,” said Patrick M. Callan, former president of the National Center for Public Policy and Higher Education.

But eliminating such policies without disadvantaging any particular student group or the institutions themselves would take the kind of broad coordination between institutions, state boards, and lawmakers -- on issues of appropriations, financial aid, and expenditures -- that is uncommon in state government these days.

Iowa Plan

Last month the Iowa board voted to eliminate what it referred to as a “tuition set-aside” that mandated 20 percent of all tuition revenue to be earmarked for aid purposes.

Craig Lang, president of the Board of Regents, said two issues drove the board’s push to change the state’s policy: the number of students whose need was (and wasn’t) being met through the tuition set-aside program – the state’s main method of funding aid – and the backlash that emerged when the public became cognizant of the policy.

“The discussion led to a public outcry over the tuition set-aside and how large it has become,” Lang said. “We had to head off the anger over it and find a solution very quickly.” A request for responses about the policy generated 14 formal responses, all of which called on the board to dump the policy, according to the Iowa City Press-Citizen.

The board’s objective now is to get the state to appropriate an extra $39.5 million – roughly the amount the university expected to raise through the set-aside program from in-state students – for the 2013-14 budget to fund a new state need-based grant program. There is already a program providing aid for Iowa students attending private colleges and universities. The board is also pushing the universities' fund-raising foundations to increase their efforts to find a new source of funds for merit aid.

Since the board has eliminated the tuition set-aside and the funding of a state grant-aid program won’t kick in until at least 2013-14, there remains the question of how the board plans to fund need. Lang said the university will “still have to provide some sort of grant aid through some mechanism other than the tuition set-aside.”

Lang noted that the universities might still use tuition revenue to fund aid, it just won’t be a certain percentage earmarked for that purpose. “Whether you call it tuition set-aside or something else, those dollars within that budget of both state appropriations and tuition dollars finance need-based aid,” he said. “Unless you have an identified source of need-based aid, and in this state we don’t have that identified resource.”

If the board does not get its funding increase, it will likely revert to funding financial aid through its various revenue streams.

Redistribution?

Last year the three universities under the Iowa Board of Regents spent a total of $35 million from tuition revenue on financial aid for needy students, as well as an addition $7.6 million for merit-based scholarships.

Based on those numbers, it’s easy to argue -- as many have -- that the colleges are taking money from some students and subsidizing others, a politically perilous position. “A lot of people barely accept the legitimacy of government as a redistributor,” Callan said. “How are they going to feel about Podunk U. as a redistributor?”

But some higher education researchers say that’s the wrong way to view what the institutions are doing. What they’re actually doing is charging differential tuition, said Sandy Baum, a senior fellow at the George Washington University Graduate School of Education and Human Development. Baum also runs the annual studies of college prices and financial aid for the College Board and gave a presentation to the Iowa board this summer. Because the education of all students at public universities is subsidized by state appropriations, philanthropy, endowment returns, and even federal and corporate research spending, no student is actually paying for their own education.

“If this is going to become a policy discussion, which would be great, it needs to be informed by the idea of the extent to which all students are subsidized,” Baum said.

For the 2009-10 school year at the University of Iowa, for example, full tuition (excluding room, board, books, supplies, etc.) was $6,824 for in-state students. That year, according to the Delta Cost Project, the university spent $18,637 per student on “education and related expenses,” a formulation that includes the costs of instruction, student services, and overhead – the kinds of things that tuition is meant to support. So even those students who paid the full sticker price only paid slightly more than a third of the cost of their education.

Baum and others argue that because most of the money from the various revenue sources flows into one general fund budget, it’s somewhat irrelevant if 10 percent of tuition revenue is earmarked for aid purposes. If that is taken away, the university can just fund that portion through other means. The fact that the aid money flows back to the university also complicates the process.

But it’s easy to see why so many families think they are paying for other students: many colleges and universities say explicitly that they take money from some students to fund others. The University of California and California State University systems agree to set aside about a third of the new revenue they generate through tuition increases for financial aid purposes. Until recently, the University of North Carolina system required the states’ universities to set aside 25 percent of new tuition revenue for financial aid.

Divided Decision-Making

So why do universities do this cross-subsidization in the first place?

The use of tuition revenue for financial aid purposes, higher education researchers say, is mostly the result of a breakdown in the coordination that used to provide for access to public universities through a combination of low tuition, high state support, some federal grants, and, in most states, a state grant aid program for needy students.

The problem is that various elected, appointed, and unelected bodies control those levers, and they don’t always see eye to eye.

Elected state lawmakers are responsible for state appropriations, a large component of most public universities’ budgets, particularly what such institutions spend on undergraduate education. In most states, and potentially soon in Iowa, the state is also responsible for appropriating money for a state need-based grant program. Appointed state or institutional boards – occasionally from different parties as those that control the legislature or governors’ office – are often responsible for setting tuition prices, the second major revenue stream.

Institutional administrators then determine their educational objectives, budgets, the number of students they want to let in, and how to distribute aid.

The system works well when everybody’s on the same page, a model that was embodied in the California Master Plan for higher education, which established enrollment targets, educational outcomes, and appropriations targets for all levels of California higher education.

But in most states, such systems have broken down under multiple political and fiscal strains, said Joni Finney, a professor with the Graduate School of Education at the University of Pennsylvania who studies the public finance of higher education.

When the institutional administrators and boards think they need more money, but the willingness to appropriate state dollars is restricted, either through politics or fiscal realities, as seen since 2008, institutions raise tuition. To mollify critics, they say that a significant chunk of that new revenue will be used for financial aid.

“I don’t think these policies were vetted,” Finney said. “I think boards of trustees just went along with it because they could attract better students and improve their rankings.”

Callan and others say non-need-based aid, which is mostly done at the institutional level, is partly a driver in this process as well. States grant programs rarely fund merit aid, so if an institution views enrolling a certain caliber of student that can only be attracted through merit aid as a compelling goal, it has to fund that through tuition or other forms of revenue.

Under Attack

While most people in higher education are aware that institutions use some of their tuition revenue for financial aid, many boards are finding that, despite regular pronouncements that colleges were engaging in such practices, the public was unaware.

Some states have taken steps to inform students and their families about how much of their tuition goes to fund other students’ aid dollars. In Texas, the tuition bill has a specific line item about how much money goes to other students. “Parents have the right to know, students have the right to know that a certain amount is being reaped off the top of their tuition bill for those who really show need,” Lang said.

Part of the backlash against such policies is attributable to the widespread concern about the increase in tuition prices and student debt. There are differing opinions on whether the fact that institutions are using tuition revenue for aid is driving up the cost of tuition. Individuals challenging such policies believe it is absolutely a factor.

Researchers say the reactionary and piecemeal approach to establishing tuition-for-aid policies makes them vulnerable, because most people don’t understand exactly how they work and never had widespread support. “I’m not so sure it is politically sustainable, because it has never been through any debate or policy process,” Callan said.

Callan and others say it’s likely that more states will see such debates in coming years.

Getting on the Same Page

Because such policies evolved because decisions were being made in a distributed manner the only way to roll them back without disadvantaging some students or wreaking havoc on the institutions’ budgets is to establish more predictable appropriations, tuition, and growth policies.

Simply limiting the use of tuition revenue for financial aid without any other infusion of money would likely decrease access to public higher education, Baum said. And given the budget challenges that Iowa is facing, like most other states, securing more funding for the program is far from certain.

A major problem with the raising the debate now, Callan said, is that most states and institutions are not in the position to have it. Places like California are struggling to maintain funding for higher education, and don’t necessarily have the money to create new grant programs.

“States, with whatever money they have budgeted for higher education, should be buying back that aid and funding these students out of state aid programs,” he said. “That way, the institutions will still have the revenue from whatever they changed in the past for use in other things, and it helps stop the growth of this policy in a way that does not jerk the rug out from under needy students.”

Lang said Iowa is taking steps in that direction. The board is planning to ask for budget increases that hover around inflation for the next several years.