Unfreezing In-State Tuition

By: Ananth Seshadri, Department of Economics at UW-Madison

The UW-System operates under “price controls” not faced by any of its peers. This short summary describes the main points that I make in my recent CROWE report. The tuition freeze was a response to Reservegate. The freeze forced the drawdown of reserves and moved control of spending from the Regents to the Legislature.

There is a substantial lifetime benefit from a college degree: In 2010, the average American who graduated from college could expect to earn $500,000 more in lifetime income net of college costs over graduating with a high school diploma. While college students decades ago, did not spend as much on college as students do today, the net benefit from college was significantly smaller.

Student loan debt is much smaller than is widely perceived: To the extent there is a crisis, it is concentrated among borrowers who went to for-profit schools, two-year institutions and other nonselective institutions. As for-profit enrollment rose, borrowing by their students increased and defaults rose. For-profit schools account for 44 percent of defaults in recent years. Borrowers from four-year colleges earn more out of college and are more likely to pay back their loans.

Lack of access is not a big impediment to attending college: Only a very small minority of Americans would like to attend college but are unable to do so due to financial considerations. High school graduates from low income families are less likely to attend college, not because they cannot secure enough loans for college, but mainly because of fewer investments in their human capital at younger ages.

College costs rise primarily due to rising premium on skilled labor: The main cost for a university is skilled labor. The cost of skilled labor has risen at a much faster rate than inflation in the last 50 years. Consequently, the cost of educating students has risen much faster than inflation. The primary driver of the cost of college is the rise in wages of highly educated workers outside the education sector.

College is partly consumption, partly investment: While the investment value of college is significant, college has a rather substantial consumption component to it. Great facilities, dorms etc. are important for any major university in order to compete with the marketplace. Recent research assigns a large consumption benefit to college and finds that most students and parents value amenities and are willing to pay for them. There is no good reason for states to subsidize the consumption component of college.

Funding the Freeze does not represent a long-term solution: Waiting exclusively for additional resources from the state in the hope that the state “funds the freeze” even in the medium run, is unlikely to be an effective strategy. Funding for health care has displaced funding for higher education. Additional general purpose revenue (GPR) does not offer a permanent source of funds. It offers a short-term two-year solution until the next biennium. And it is infeasible for the current government to commit a future government to fund the freeze.

The state of Wisconsin does not provide UW-Madison a subsidy: The contribution by the state of Wisconsin to UW-Madison is just sufficient to offset the differential cost of an out-of-state student relative to an in-state student. Rather than provide a subsidy to UW Madison the institution, the existing subsidy is tantamount to a voucher given by the state to residents of Wisconsin which entitles state residents to send their children to UW-Madison at the lower in-state rate.

Regardless of how the impact of the UW-System on the State is measured, the economic impact is large. Research institutions generate spillover effects on neighboring areas, and their impact is much larger than the impact of most alternative use of scarce taxpayer dollars.

The tuition freeze has had an adverse impact on economic activity at UW-Madison. Larger class sizes and an inability to grow at a fast-enough pace especially in high demand areas is one of the many negative consequences of a tuition freeze. Other consequences include diminution of quality and reduced research activity, which eventually leads to loss of research support as well as ranking and reputation. A tuition freeze in the face of Bucky’s Tuition Promise benefits middle and high-income families and not poor families who get to attend UW-Madison tuition free. There is little evidence that the tuition freeze has improved access. There is consequently neither an equity nor an efficiency-based justification for extending the tuition freeze.