The Emergence (and Perils) of Income-Targeted Free Tuition

Once upon a time, there were two broad streams of thought about tuition in public higher education.  The first was simple enough: make it free.  No charge at the point of service, no charge ever, just a universal benefit…for those lucky enough to get in (on the whole, “free” tuition countries tend to have fewer students because there is less money to accommodate them).  The second was also pretty simple: charge fees, but provide a mix of loans and grants to those who needed help paying the bill, thus creating beneficial price discrimination: rich families pay more than poor families. The problem with the latter approach is that it’s complicated.  People see that there is a sticker price, but don’t always know about or understand the countervailing subsidies.  And so in countries like Canada, where the total value of bursaries and scholarships have more or less equaled the amount of tuition taken in from domestic students for quite awhile now, people are still under the impression that tuition represents a big financial barrier.  Free tuition may be wasteful in that it provides subsidies to those who don’t need them, but it is simple to communicate.

But now a third way on tuition is emerging across the Western hemisphere: call it “income-targeted free tuition”.  Take the clarity of the free tuition pitch but make it income-tested.  It first appeared in the UK in the late 1990s, when tuition fees there were briefly income tested (from 1998 to 2005, students from families earning less than £20,000 paid no fees while those earning from £20,000 to £30,000 paid half-fees).  It is an approach which is now appearing in places as far away as Fredericton, New Brunswick and Santiago, Chile.  

In Chile, this approach started essentially by accident.  President Bachelet came to office in 2012 promising free fees for all, but the tax reform that was supposed to pay for it ended up yielding far less money than expected (falling copper prices played a role, too).  In the end, there was only enough money to pay for “gratuidad” for students coming from the bottom six deciles of income (about a third of all students).  

In Canada, it has been more deliberate.  In early 2016, the government of Ontario, free-riding to some extent on an improvement to federal system of grants, decided to re-jig its somewhat complicated system of loan forgiveness and tax credits into a “free tuition” guarantee for low- and middle-income undergraduate students.  Institutions were not actually barred from charging tuition; rather, what happened was that the government committed to paying grants equal to average tuition in the province for everyone with family income under (roughly) C$60,000.  Above that line, students still get grants but on a sliding scale, and they peter out completely somewhere over $100,000.  The government of New Brunswick followed suit over the next 12 months, and several other provinces are now considering something similar.

In the United States this idea is catching on.  During the 2016 election campaign, Hillary Clinton suggested a Chilean-like system, wherein the federal government would provide funds to state higher education systems if they agreed to stop charging tuition fees to students from families with income less than $125,000 (or, roughly, 80% of the student population).  That idea was always a little bit pie-in-the-sky from a federalism point of view: the impracticalities were well covered by Kevin Carey at the time.  But though that idea died on November 8^th, the idea continues to resonate at the state level, most importantly in New York where Governor Cuomo has proposed a form of “free tuition” for anyone attending the City University of New York (CUNY) or the State University of New York (SUNY) and whose family earns less than $125,000.  

Governor Cuomo’s offer is not quite the same as Secretary Clinton’s – it’s more Ontario than Santiago.  Basically, he’s going to offer students from families below the $125,000 threshold whatever amount of grants it takes to equal tuition.  This payment, to be known as an "Excelsior Scholarship” (Really!) is equivalent to tuition minus any grants the student is receiving from the federal or state governments via the Pell grant system.  

Now while all these systems sound similar, their distributional consequences are not.  In the Canadian cases, the gains accrue to students from families under $60,000; families making over $100,000 are somewhat worse off because of the elimination of tax credits used to pay for the increase in grants.  Similarly, in Chile, the benefits accrue nearly entirely to students from below-average income though here too there are offsetting losses from reduced bursary funding.  But in New York, the benefits of the additional funding go almost entirely to families with income between $80,000 and $125,000  because families earning less already have tuition mostly covered through grants.  So the majority of the funding goes to an income class that has never had much trouble paying for higher education (at public institutions, anyway) in the first place.

The key to making income-targeted free-tuition work is not to make threshold too high.  Even the Chilean government, once very keen on gratuidad for all has  come around to this realization.  For budgetary reasons, the government was forced to limit “free” tuition to students from families in the bottom six deciles of income.  This summer, the Chilean Treasury Department published cost estimates  for the program.  In its present state, the fully-phased in cost of the program will be 607 billion pesos (~ US $950M).  Adding each of the next four deciles raises the price by about US $350 billion, or 58%.  That is to say, free tuition for everyone would cost over 2 trillion pesos, or over three times as much as it costs for the bottom six deciles.  The difference is equal to 1.5% of GDP.  And for what?  The fact that it costs so much is a reflection of the fact that participation from these groups is already high without the need of government help.

In short, while targeted free tuition makes lots of sense, it really does need to be targeted.  If targeting weakens, the program becomes more expensive and less effective.  New York’s plan clearly suffers from insufficient targeting.  Ontario’s plan has it about right.  But beware: the Premier occasionally muses about extending the plan to higher income groups and there’s certainly a chance such an idea will make it into the policy conversation as the provincial election approaches, possibly leading to a degree of madness and wasted public funding.