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Running head: Alternative Funding for Higher Education

Alternative Funding for Financing Higher Education Christina Mazuca Michigan State University

ALTERNATIVE FUNDING FOR FINANCING HIGHER EDUCATION Introduction Higher education is recognized both as an engine of economic growth and as a gatekeeper of individual positions of high remuneration and status (Johnstone, 2005). The ever changing financial environment surrounding higher education is well documented. Facing shrinking budgets, competing priorities, public resistance to increasing state levies, and prohibitions on deficit spending, state legislators more and more often find themselves in the

unenviable position of debating the relative essentiality of state services, including postsecondary education (Cheslock & Gianneschi, 2008). As a result, higher education, a discretionary budget item in most states, has often been moved to the end of the state funding queue, resulting in state governments allocating a smaller share of their spending towards higher education (Kane et al., 2003; Rizzo, 2004; State Higher Education Executive Officers [SHEEO], 2007, from Cheslock & Gianneschi, 2008). In fact just recently in Michigan we learned about Governor Snyders proposed cuts including a 15% funding cut for higher education operating funds (Higher Education, B-41). The financial principles and problems of higher education are much the same worldwide (Johnstone, 2005). Each states unique combination of policy choices and fiscal and environmental conditions provides the context within which higher education funding occurs (State Higher Education Finance [SHEEO], 2009). Over the past 25 years, state and local support for higher education has twice recovered following major economic recessions (SHEEO, 2009). Only time will tell when real recovery from the current recession will occur and what that eventual recovery will mean for the economy and higher education (SHEEO, 2009). Given recent economic conditions, it is a bit of an understatement to claim that financing higher education has become an increasingly complex problem. Administrators grapple with

ALTERNATIVE FUNDING FOR FINANCING HIGHER EDUCATION dwindling state appropriations, donor apathy, and deflated endowments while students face yearly tuition increases. In addition, the loss of financial aid for many students is distressing. There is an increased likelihood that higher education could rise beyond the financial reach of

many students. In an era in which higher education is seen as a consumer good and governments steadily reduce their financial support for colleges and universities, it is imperative that legislators, administrators, and students explore alternative ways to finance higher education. In this paper I will explore some alternatives and look at some of the ways in which states and policy makers are implementing new and creative alternatives for funding higher education. Higher Education Finance Issues The issue of higher education finance exists within economic, social, and political contexts. Within the economic context, higher education is believed to make individuals more productive and screen for different kinds of characteristics. In short, higher education is essential for most good jobs, and the absence of education beyond high school will be an increasingly formidable barrier to obtaining them; but the mere possession of an advanced degree will neither guarantee good, nor lasting, employment (Johnstone, 2005). Socially, access to and success in higher education remains tied largely to socioeconomic class. As to the political context, society has become more conservative and therefore resistant to social welfare programs. These themes are intertwined, of course. For example, the political inclination to seek private solutions to what used to be viewed as public problems is given impetus by declining public revenues (Johnstone, 2005). This is highlighted by the importance of capital campaigns and growing endowments at institutions across the country. Administrators are turning to private donors and increased research dollars to fill the gap created by the loss of public funding. But these economic, social, and political themes, for all their complexity, provide a context for


consideration of the three broad issues of higher education finance: the size of the nations higher educational enterprise, the efficiency and productivity of this enterprise, and the source of revenue to support this enterprise (Johnstone, 2005). While the size and efficiency of the enterprise certainly shape financing decisions, the revenue piece of finance is the focus of this paper. Financing higher education requires political leaders, policymakers, and educators to address public policy questions (SHEEO, 2009). One of the questions that have been posed and will continue to be posed is how costs should be distributed between parents, students, taxpayers, and philanthropists. Costs can be shuffled from one party to another, but always must be paid. The cost-sharing scenario that has taken place during the past decade has been lower taxpayer contributions, reduced institutional budgets, higher tuitions, level parental contributions, and higher debt burdens. Support for higher education involves a substantial financial commitment by state and local governments (SHEEO, 2009). State higher education appropriations grew by only one percent nationally in FY 2009 (SHEEO, 2009). While state appropriations are declining as a share of public institutions budgets, they remain an important revenue source and a major determinant of an institutions well-being (Cheslock & Gianneschi, 2008). In fact, they can impact an institutions ability to acquire revenues from other sources (Cheslock & Gianneschi, 2008). Advantages gained from additional state dollars help institutions raise revenues from other sources (Cheslock & Gianneschi, 2008). By diverting financial support from public universities to other areas of the budget, legislators make it clear that institutions are expected to raise substantial revenue from alternative sources. Tuition and state appropriations make up the largest percentage of revenue in higher education. State appropriations (24 percent) were the largest source of revenue for public

ALTERNATIVE FUNDING FOR FINANCING HIGHER EDUCATION institutions, while tuition and fees (17 percent) were the second largest source

(www.nces.ed.gov). In 2006-07, student tuition accounted for 17 percent of the total revenue for public institutions, 26 percent for private not-for-profit institutions, and 75 percent for private for-profit institutions (www.nces.ed.gov). Demand for education at many public higher education institutions is not perfectly elastic, and therefore future tuition increases should have diminishing returns. Institutions will either have a difficulty attracting a sufficient number of students at higher tuition prices or will be forced to discount heavily, which will decrease the amount of revenue generated. When tuition dollars cannot be increased further, public higher education institutions will become especially reliant upon alternative sources of revenue (Cheslock & Gianneschi, 2008). Great public universities have long been both the financial and academic safety plan for high-performing college-bound seniors and their parents (Regnier, 2009). But now, just when families most need low cost, high quality schools, state universities are under intense financial pressure. The cost of a public college, even after aid, now eats up 33 percent of a lower-middle income familys earnings, compared with 23 percent 10 years ago, according to the National Center for Public Policy and Higher Education. For upper-middle class families, that figure has gone from 12 percent to 16 percent (Regnier, 2009). Given these pressures, states are likely to require higher-income families, at least, to pay more. One idea, called high tuition/high aid, is intended to get more dollars out of families who can spare them and direct more aid to those who cant (Regnier, 2009). Students have long opposed the high-tuition, high aid model, claiming that high aid often comes up short (Wickert, 2005). The high-tuition, high-aid model is based on claims of efficiency and equity. The efficiency claim begins with the tenet of public finance theory that any public subsidy of a

ALTERNATIVE FUNDING FOR FINANCING HIGHER EDUCATION good or a service that consumers are likely to purchase anyway, in the absence or diminution of the subsidy is an inefficient use of public tax dollars (Johnstone, 2005). It is assumed that since students are likely to enroll in college regardless of cost, these funds should go to more pressing issues such as health care, tax cuts, or reducing the deficit. The equity argument in favor of high tuition, high aid is based on two assumptions: first, that public higher education is actually partaken of disproportionately by students from uppermiddle income and affluent families; and second, that the state taxes used to support public higher education tend to be proportionate or even regressive and thus are paid by many lowermiddle-income and poor families who are unlikely to benefit (Johnstone, 2005). Thus, the hightuition, high-aid model of public higher education finance is claimed to be more equitable than across-the-board low tuition because it targets all public subsidy only on the needy and imposes full costs on students or families affluent enough to pay (Johnstone, 2005). High Tuition High Aid Model The case against the high-tuition, high-aid model rests partly on the oversimplification

and political naivet of the case made on its behalf and partly on the case to be made for the very existence of a public higher education sector (Johnstone, 2005). Four main points make up the case against high-tuition, high-aid: sticker price, quality, no guarantee of aid, and higher education as a public good. First, the price tag of up to $25,000 for a year at a public university is discouraging to many prospective students. This is a substantial financial burden for parents and students alike. The prospect of receiving some financial aid may make this pill a little easier to swallow, but at the end of the day it is still a tremendous commitment.

ALTERNATIVE FUNDING FOR FINANCING HIGHER EDUCATION Second, a high-tuition, high-aid policy would lessen the quality of public colleges and universities (Johnstone, 2005). The plan is to reduce state tax revenues going to colleges and

universities. In theory, the revenue from students paying full tuition makes up the difference. The problem arises when the private sector, with its large endowments and support of wealthy alumni, target the same upper-middle income students that are supposed to be paying full tuition at public institutions. Third, high tuition does not guarantee high aid (Johnstone, 2005). Generally, the public and elected officials will support policy that directly affects them or their family. However, legislation that targets one group of constituents, in this case lower income students, will not be supported. Fourth, the high-tuition, high-aid model is a denial of the appropriateness of higher education as a public good (Johnstone, 2005). The mission of public colleges and universities is not to provide a subsidized education to students. Public institutions should be educating the best and brightest students, serving society, and be an engine for economic growth. The high-tuition, high-aid model essentially denies most of these public purposes to public higher education and substitutes only a public subsidy for those who are too poor to afford what would become an otherwise unsubsidized, expensive, and essentially privatized product (Johnstone, 2005). The high-tuition, high aid model has been employed by colleges and universities for many years and will likely continue to be used by administrators as a means to offset reduced appropriations. This model, however, should not be viewed as an alternative revenue generator for institutions. With so many complex issues surrounding higher education, it is appropriate to ask why finance is so important. Understanding the components of financing of higher education is especially critical for administrators, parents, and students. Soaring tuition and reduced


appropriations will continue to be the norm. Parents and students will have to make increasingly difficult decisions about taking on the debt load. Administrators will have to make difficult decisions related to access and revenue generation based on lower state funding. Possible Solutions Throughout the country there are programs that are being implemented by students, university administrators, and legislators that center on alternative ways to finance higher education. There are several programs aimed at helping parents and students pay for their college education. One such program is called UPromise. The program operates under the idea that everyone should be able to afford college. It allows parents, extended family, and friends to combine their efforts to help pay for a student to attend college. Basically, an account is attached to a credit card. Every time you make an eligible purchase, the participating stores and select brands return a portion of that money back to you. Those earnings accumulate in your childs UPromise account and are then invested in a 529 plan to help pay for college expensesall taxfree (Welcome to UPromise, n.d.). Even though the idea of a college savings account seems simple this makes saving possible with little or no effort. Parents and family members can spend as they normally would and earn money for their student in the process. Similarly, in Wisconsin there is a program called the Wisconsin College Savings Program that offers parents a flexible, yet structured way to save for future higher education expenses and minimizes the amount of loans and student debt (Sass, n.d.). Recently Mark Yudof, president of the University of California, announced his plan called You Can to the state of California. While his plan is not necessarily new in nature, it is an ambitious effort to raise $1 billion for student support over the next four years. Our message is simple. If you can earn the grades, you can get into the University of California. And if your

ALTERNATIVE FUNDING FOR FINANCING HIGHER EDUCATION family needs help, you can get financial aid said Yudof (University of California Office of the President, 2009). This plan would double the amount of private support that the UC system has raised for scholarships, fellowships, and other gift aid in the previous five years. While Yudof realizes that this is not the only solution, he is trying to impress upon his state how important

higher education is given the state budget cuts that California is facing. There are additional steps Yudof is considering in order to fund higher education and cope with cuts and fund more students. In Michigan the state has created legislature that has established Promise Zones. The first one was created in Kalamazoo. This initiative is privately funded and promises that each student graduating from Kalamazoo Public Schools will receive the opportunity to attend postsecondary education with up to a 100 percent tuition scholarship. Based upon the number of years in the district, students are eligible to receive this scholarship. They must attend a public State of Michigan university or community college, make regular progress toward a degree or certification, maintain a 2.0 grade point average, and complete a minimum of 12 credit hours per semester. Other Promise Zones are being established to try to duplicate the effects of the Kalamazoo Promise Zone. In all there are 10 promise zones each at different stages of development with Kalamazoo being the most established. In other states such as Colorado, the legislature has turned to a voucher system. Its looked at as funding students directly rather than direct appropriations to institutions. College opportunity Funds (COF) were meant to be the primary funding for higher education. Every undergraduate would receive a stipend each year, to spend at any two- or four-year state supported institution and some Pell Grant recipients who are attending private institutions. The stipend is recalculated annually based on tuition per credit hour (Prescott, 2010). There are also



funds for graduate students. Students would then ultimately choose which college would receive their allocation of state funds rather than institutions receiving a lump sum from the state each year. There are of course some issues with this plan but it is yet one more way in which to think about funding higher education in a system that is currently not making the grade. Many universities are being asked to severely slash their budgets. Some have thought of some creative ways in which to increase revenue. For example, in 2009 Alabama and Virginia Tech played each other in the Chick-fil-A kickoff game. More and more colleges are turning to corporate sponsors and becoming much more commercialized (Carter, 2009). This brings in millions of dollars per event to the schools who participate. While athletic departments are also being asked to cut their budgets by doing things like eliminating media guides and reducing the amount of travel; they are also finding that budget cuts are simply not enough. While the Chickfil-A sponsored game falls on the large-scale end of the spectrum, schools are also doing things on a smaller scale to try to bring in extra dollars. For example, universities are now coming up with creative ways to sell season tickets, offering tickets for purchase in three-packs of home games, and trying to pump up sales by having automated phone messages from players asking people to purchase tickets. These trends will continue and universities will continue to look for ways to expand their brand in order to create new revenue streams. President Obama is promoting new legislation aimed at higher education access for all. We need to put a college education within reach of every American. Thats the best investment we can make in our future. Ill create a new and fully refundable tax credit with $4,000 for tuition and fees every year, which will cover two thirds of the tuition at the average public college or university. Ill also simplify the financial aid application process so that we dont have a million students who arent applying for aid because its too difficult. I will start by eliminating

ALTERNATIVE FUNDING FOR FINANCING HIGHER EDUCATION the current student aid form altogetherwell use tax data instead (Obama, 2007). During his


2007 campaign President Obama and Vice President Joe Biden talked about the efforts that need to be made in order to compete in a global economy and to stabilize our economy in the United States. All of these alternative ways to finance higher education have one thing in common commitment to higher education by all parties. It is time to rethink the social charter between America and higher education. There is great need for a social movement that would help stabilize higher education finance, particularly revenue streams, if it is fueled with collective will and action. It is our collective responsibility to create a social movement involving government, education, parents, and students. Conclusion There are alternative programs for financing higher education that exist that involve parents, students, universities, and legislators. All parties involved in higher education finance must think outside the box relative to higher education revenue. Perhaps it is time for a social movement involving the collective support of government leaders, educational leaders, parents, and students that could change the way higher education is financed and renew the charter between the public and higher education. The future will continue to present a turbulent funding atmosphere. The approaches and solutions that have worked in the past may not be the best solutions going forward. By dismissing the notion that the future can be planned for based on the past, higher education could be funded by creative, alternative sources with all parties contributing to fundraising and ideas that could improve the outlook of higher education finance.



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State Higher Education Executive Officers. (2009). State of Higher Education Finance FY 2008. Boulder, CO: Author. University of California Office of the President. (2009, October 23). UC president announces twin efforts to increase student support. Retrieved March 22, 2011, from http://youcan.universityofcalifornia.edu/scholarships.html Welcome to UPromise. (n.d). Upromise.com. Retrieved March 22, 2011, from http://www.upromise.com/welcome Wickert, D. (2005, April). State considers a Robin Hood tuition plan. Knight Ridder Tribune Business News, 1.