The Cost of Free-College Plans

Spring 2020

Free college has become a mainstream progressive policy idea. What started as a fringe proposal from Senator Bernie Sanders in 2016 became a plank in the platforms of a number of Democratic presidential contenders in 2020. In addition to Senator Sanders, Senator Elizabeth Warren and Mayor Pete Buttigieg enthusiastically endorsed a federal policy to make public four-year colleges and universities tuition free. Democratic lawmakers in the House and Senate have also sponsored bills to advance such policies, like Hawaii senator Brian Schatz's "Debt-Free College Act," which many of the 2020 Democratic presidential candidates co-sponsored. Meanwhile, left-of-center think tanks, advocacy groups, and philanthropic foundations are building support for free-college policies. Should Democrats pull off a major electoral victory this year, free college will be at the top of their agenda.

The details of the free-college plans vary, but they share the same basic design. Under what proponents call new "federal-state partnerships," Washington would match state spending to completely subsidize tuition at public colleges and universities for in-state students. Participation in these new partnerships would be optional for states, and they could opt in only if they agreed to meet a range of new federal requirements. These plans share the same central feature because they are motivated by the same definition of the problem. Their proponents argue that the root cause of runaway college prices is inadequate funding from state governments, a problem that cannot be solved by simply expanding existing forms of federal grant aid. They believe that more federal money, without strings attached, will only give states license to further "disinvest" in their universities, and tuition prices will continue to climb. In their view, therefore, a federal matching grant that requires states to boost university funding — enough to bring tuition to zero — would solve the problem. (Nearly all of these plans cover community colleges and four-year institutions, but this discussion will be limited to the provisions that apply to four-year institutions.)

Thus far, conservatives have responded to these proposals by challenging the merits of free college generally. They say free college would be wasteful because not everyone should pursue a bachelor's degree. Or they argue that the policy is akin to Robin Hood in reverse because working-class taxpayers would underwrite college degrees for their higher-earning peers. Perhaps these arguments will resonate with voters and carry the day, but they are very abstract, and ignore deeper problems with the free-college agenda.

A more compelling critique would take up the details of these plans and the diagnosis in which they are rooted. In fact, existing financial-aid policies are working much better than the free-college advocates acknowledge. Reformers would do well to expand on our current system's underappreciated successes through incremental changes rather than layering on a vast new system of matching grants and price controls that stands to introduce a host of unintended consequences.

DISINVESTMENT AND AID

Free-college advocates place much of the blame for rising tuition on state governments. States typically fund their university systems with annual appropriations to offset some portion of what students would otherwise have to pay to cover the full cost. These appropriations averaged $7,853 per full-time student in 2018. Free-college proponents argue that states have cut (or failed to adequately increase) these funds to such a degree that institutions of higher education have no choice but to raise tuition to cover their costs. In theory, matching grants would convince states to increase direct funding to public universities and bring tuition prices to zero.

Most observers accept the claim that inadequate funding is the main culprit behind rising tuition at public universities. And state funding surely plays a role. But there is more to the story than advocates have let on. As Andrew Gillen of the Texas Public Policy Foundation has shown, the claim is often based on cherry-picked periods of time, such as the years during and immediately after the recession in 2008. Those making this claim also tend to base their analyses on an unconventional measure of inflation, one that gauges university expenses, not a broad set of prices like the Consumer Price Index or the Personal Consumption Expenditures Price Index (PCE). Using a higher rate of inflation underestimates how much states have actually increased their budgets for universities.

Correcting for these distortions reveals that state funding on a per-student basis is substantially higher today than in 1980, the earliest year for which data are available. (This article adjusts for inflation using PCE.) Today's average is $1,600 higher per student in inflation-adjusted terms than the $6,171 that states provided in 1980, but is about $700 below the two peaks in 2001 and 2008 that followed periods of strong economic growth. Current funding is also more than $1,400 above the recent low in 2012 that followed the Great Recession. In other words, state appropriations to colleges and universities tend to rise and fall with economic cycles, but the long-term trend does not show a steady decline in funding on a per-student basis.

The argument that state-disinvestment critics are actually making, albeit implicitly, is that state funding has failed to keep up with public universities' spending. While state funding has indeed increased, even after factoring in inflation and rising enrollments, the underlying cost of higher education has grown faster still, which has fueled tuition increases. Free-college proponents view these rising costs as a problem to be solved with more government funding. Under their proposals, the growing difference between what universities spend and what states have provided in appropriations would now be fully covered by a new federal-state matching-grant program.

This emphasis on state appropriations in the free-college debate obscures the many sources of aid available to students and ignores what students actually pay after this aid is taken into account. State governments operate grant programs, separate from their direct funding to universities, that can provide thousands of dollars in aid to individual students; the Georgia HOPE scholarship is just one example. Universities themselves also offer tuition discounts and grants to certain students. And the federal government offers its own financial-aid programs, such as the Pell Grant and tax credits that offset tuition expenses.

The state-disinvestment narrative, and the broader public discourse about rising college prices, often ignores these sources of aid. Instead, the debate focuses on the "sticker price" that colleges charge, even though few students actually pay this amount. The sticker price is what a university advertises after direct state funding has reduced the price but before any grants, scholarships, and tax credits are factored in.

On average, sticker prices at public universities have increased dramatically over the past two decades. For in-state students from families earning less than $125,000 a year, the group that many free-college proposals target, sticker prices have more than doubled since the mid-1990s after factoring in inflation. (Because some free-college proposals do not include income limits but others do, this analysis will focus on students from families earning less than $125,000 as a general set of beneficiaries.) A year of tuition for these students averaged $3,169 in the 1995–96 academic year (this and all figures in the remainder of this essay are in 2015 dollars), the earliest year for which detailed data are available from the U.S. Department of Education's National Postsecondary Student Aid Study. Twenty years later, average tuition had increased to $7,719.

Taken by itself, such an increase might justify a major new policy like the ones free-college proponents have proposed. But the many sources of aid that are currently available to students to finance that sticker price, including grants, tuition discounts, and tax credits (but excluding student loans), have also increased at a rate that greatly exceeds inflation.

In the 1995–96 academic year, the students that today's free-college proposals typically target received about $1,500 annually in financial aid. By the 2015–16 academic year, the amount had grown to over $6,000. Specifically, average tuition and fees after aid were $2,442 in the 2015–16 academic year, just slightly higher than the $2,001 students paid for a year of tuition and fees 20 years earlier. It turns out that the substantial increase in sticker prices at public universities, which is a major justification for the free-college proposals, has been almost completely offset by a commensurate rise in student aid. The problem that free-college proposals seek to solve with a new source of federal funds has already been mostly solved.

The chart below shows the average sticker price and net price (after student aid is applied) for the academic years covered by the quadrennial National Postsecondary Student Aid Study. In addition to showing little change in the average net price, it also reveals that net prices actually dipped following the Great Recession that ended in 2009. This runs counter to another narrative that free-college advocates advance: They argue that state funding cuts made around this time caused students to pay higher tuition, yet the net price data show nothing of the sort. Ironically, free-college supporters also argue that federal matching grants are needed to guard against the harmful budget cuts that states forced on public universities during the last recession, thereby protecting students from tuition hikes. Increases in other forms of student aid have accomplished exactly that on their own.

To be sure, the group of students discussed here has become slightly poorer over time, with average incomes about $4,000 lower in 2015–16 than in the mid-1990s. In theory, that should boost their overall eligibility for student aid, which would put downward pressure on average net prices and mask tuition increases in the data. But those demographic changes do not fully explain why there has been so little growth in net prices. Compared to the mid-1990s, students with similar incomes tend to qualify for more aid today whether they are poor or middle class. Financial aid has simply become more generous for a wider range of students.

While all forms of aid have grown, the federal Pell Grant and tuition tax credits have done the heavy lifting to keep net prices down. They accounted for nearly 60% of the increase in aid for students from families earning less than $125,000 who attended in-state universities. These students received about $600 on average in federal aid in the mid-1990s, mainly in Pell Grants. Twenty years later, average aid had increased to about $3,200, with approximately $1,000 from new tax benefits like the American Opportunity Tax Credit. In addition to increasing the size of these benefits, policymakers also raised the income caps for eligibility, allowing more middle-class families to access aid.

The twin trends of rising student aid and relatively flat net prices have not, however, applied to all college students. That may be the key to understanding the disconnect between the data presented here and the view that colleges and universities have become increasingly unaffordable.

This analysis has thus far been limited to students attending in-state public universities who are from families with incomes less than $125,000, the core group of students that free-college policies tend to target. The picture changes considerably when looking at the prices students from families with incomes above $125,000 paid at all types of institutions of higher education. After adjusting for inflation, average annual net tuition for these students has increased from approximately $9,000 in the mid-1990s to just under $13,000 in recent years. In other words, students from high-income families have experienced tuition increases about nine times larger than their low- and middle-income peers at public universities.

This is partly because high-income families are far less likely to qualify for the types of aid that have been instrumental in keeping tuition increases in check for other students. They are also more likely to attend the most expensive institutions of higher education where price increases have been the most pronounced: private colleges, elite and selective institutions, and out-of-state public universities. This might explain why the narrative about sharply rising college prices dominates popular discussion despite what the data show for low- and middle-income students at in-state public universities. Those driving the narrative are likely focused on a narrow and elite set of students who have indeed seen prices rise significantly.

That may be the greatest irony of the free-college agenda: It appears to be a response to the rising prices that high-income families are paying, while the students that the policies are intended to benefit have seen little change in net tuition prices in 20 years.

FIRST OR LAST DOLLAR

Many observers may be surprised to learn that net tuition prices averaged just $2,442 in recent years for the students that most federal free-college policies would target. The fact that net prices at public universities are relatively low actually makes implementing a free-college policy less radical than it might at first seem. About 42% of the students that most federal free-college policies target already have all of their tuition offset by various forms of student aid. That is double the share in the mid-1990s. Theoretically, it would not take much in budget resources to cover the "last dollar" and bring tuition to $0 for the remaining students — or it would cost less than many observers assume.

Several states have created their own free-college plans to do just that. New York's Excelsior Scholarship, launched in 2017, uses state funds to pay the last-dollar amount needed to bring tuition down to zero if the student attends a public university and meets other requirements. Tennessee's Promise Scholarship does the same, but only at public two-year schools and community colleges. These states have found that, due to the substantial aid that is already in place, covering the incremental tuition dollars needed to make a public college free is not out of their fiscal or political reach.

Most federal proposals for free college are not, however, last-dollar programs, as they are in New York, Tennessee, and other states. They are first-dollar programs that require states to fully cover students' tuition before factoring in grants and scholarships. This is what Senators Sanders and Warren proposed, and the minimal details Mayor Buttigieg released imply this is also how his plan would have worked. In addition to greatly increasing the costs of the proposals to both the state and the federal governments compared with the last-dollar approach, the first-dollar approach frees up existing financial aid to cover students' living expenses.

A stylized example helps to illustrate these effects. Consider a student who is charged a $6,000 sticker price for a year of tuition. Suppose he receives a $4,000 Pell Grant as his sole source of financial aid. In a last-dollar program, the state government must use matching-grant funds to cover the remaining $2,000 in tuition expenses that this student would otherwise pay out of pocket (or with loans). In a first-dollar program, the student's grant cannot count toward the state meeting the free-tuition requirement. The state must cover the full $6,000 with its own funds and the new federal matching grant. In this example, the first-dollar approach triples the cost of the free-college policy for both governments. It also lets the student use his $4,000 Pell Grant for living expenses now that he no longer incurs tuition charges.

Converting the Pell Grant into a stipend for living expenses is actually a key purpose of first-dollar free-college plans. As Senator Warren puts it, "we need to go beyond just covering the cost of tuition and fees. Non-tuition costs of college like room and board and books have been going way up, too." Covering these costs with Pell Grants, she says, will allow students to graduate debt free. Half of the students whom free-college policies would target currently receive a Pell Grant at an average value of about $4,200. Mayor Buttigieg and Senator Warren proposed to increase the maximum Pell Grant by $1,000 and $1,500, respectively, for full-time students to boost the share of living expenses covered. Notably, that still leaves students responsible for a significant share of such expenses, which average about $12,000 nationally.

Senator Sanders's policy takes these stipends a step further. Under his plan, many students would have their living expenses entirely covered with state and federal funds. Specifically, states must use the matching grants to waive all tuition costs and fully subsidize living expenses for students who qualify for the maximum Pell Grant. These students generally come from families with incomes below $30,000. A shockingly large share of students at in-state public universities would meet this definition. About 38% have incomes below $30,000, in part because many are classified as independent of their parents. This provision also features a steep eligibility cliff. A student with average living expenses whose income exceeds the cutoff for the maximum Pell Grant would lose out on the full $12,000 stipend and receive just under half that in a Pell Grant instead.

Another prominent free-college plan takes stipends beyond the levels proposed by any of the presidential candidates. Senator Brian Schatz's Debt-Free College Act, which four Democratic presidential candidates co-sponsored, is built around a federal-state matching grant like the other proposals. But Schatz would not cap prices at $0. Instead, universities in participating states would be forced to limit the total cost of attendance (which includes tuition and living expenses) to the students' expected family contributions (EFC), which appears to be a reference to the existing federal formula for awarding Pell Grants based on income and assets. The size and scope of this policy is astounding. It would apply to all students who receive a Pell Grant, fully half of in-state students at public universities who are from families earning less than $125,000. Moreover, the EFCs of these students averaged just $900 in recent years, which is all that universities could charge them for the total cost of attendance under this plan. The University of California, Berkeley, and California State University, Fullerton, would both cost $900 per year for students with that EFC, despite Berkeley listing a $32,000 cost of attendance compared with Fullerton at $23,000.

The Schatz plan effectively turns the federal EFC formula into a national pricing schedule for universities, one that ignores the many justifiable reasons why public universities charge different prices. It also sets prices so low that many students will have not only their tuition covered, but most of their living expenses as well.

WHAT COULD GO WRONG?

That the free-college proposals place so much emphasis on covering students' living expenses seems out of step with the problem they claim to address. Reversing state disinvestment was never about addressing a decline in funding for living stipends; states have never broadly provided living stipends for college. These provisions are nothing less than a paradigm shift in U.S. higher-education policy. As such, they are a costly experiment that merits more debate, especially about the unintended consequences such policies may unleash.

Covering most or all of students' living costs would radically change the incentives students face in deciding whether, how, where, and for how long to pursue a higher education. In a way, these policies would pay students to attend college — though only at in-state public universities. They also seem like an invitation for wasteful behavior or even outright abuse.

For students who live off campus, large stipends will need to be provided as refund checks that they can use to meet their expenses, as is the case under current financial-aid policies. The incentive to enroll and collect one of these refund checks, whatever a student's ambition and career interests, would be significant under this proposal. It could also create an incentive for students to wait until they are older to pursue college so they can be classified as financially independent, bringing their incomes below the threshold and qualifying them for an average $12,000 living stipend. Even the extreme gaming recently profiled in the Wall Street Journal, by which parents transferred guardianship of their children to poorer relatives or acquaintances to qualify for more student aid, seems reasonable when eligibility for a $600 Pell Grant triggers a full-ride scholarship to any in-state public university — as could happen if the Schatz proposal were enacted.

State governments would also face counterproductive incentives under these plans. States that have historically provided relatively little funding to their public universities, like New Hampshire, will have to dramatically ramp up their spending to participate in the free-college programs. Even with federal matching funds, this may prove to be too much of a reach. States on the other end of the spending spectrum, like California, might be more likely to support plans for tuition-free universities to pick up new federal matching funds. If high-tuition states do not opt into the free-college plans and low-tuition states do, the policy may actually exacerbate existing affordability gaps. The federal government would be financing an effort to reduce the cost of college in states where it was already the most affordable while changing nothing in states where it is least affordable.

There would also be unintended consequences if the policy encouraged the opposite response. Matching the funds that states spend to achieve free college relative to what they spend today, as many plans would, rewards states that have historically spent the least on their public universities. That means the states with the furthest distance to travel to reduce tuition to zero would receive the largest federal matching grants and reap a financial windfall. Kevin Carey of the left-leaning think tank New America argues in the Washington Monthly that this problem is serious enough to cause the whole policy to collapse. It may even doom the policy from the start. As Carey puts it, "members of Congress in states that more generously subsidize higher learning would rebel."

States that opt into one of these proposed plans might also game the new matching-grant system. There are no ceilings on the matching grants, and some of the proposals even explicitly say that states will receive separate matching funds for any additional amount they decide to spend on their higher-education systems. A creative state legislature or public university might re-categorize a wide range of programs and initiatives as part of the cost of operating a public university system. Of course, that would lead federal policymakers to become ever more prescriptive about what is and is not an allowable expense under the matching-grant program, centralizing higher-education policy in Washington, D.C.

This dynamic is already on display in the proposals, and it is surely just the beginning. For example, the Sanders plan aims to prevent universities from hiring more adjunct faculty as a cost-saving measure to make up for lost tuition revenue. Sanders would also prohibit federal matching funds from financing athletic facilities, although he explicitly lists office space as an allowable expense.

Senator Schatz does not mince words when it comes to centralizing policy in Washington. His bill language plainly states that a "[s]tate that receives a grant under this part to establish a State-Federal partnership may not impose additional eligibility requirements on students other than those contained in this part." Federally funded free college will almost certainly transfer to Congress and the federal Department of Education many policy decisions that have historically been the purview of states and universities.

Surprisingly, none of the proponents of the free-college plans seem worried that states may aggressively enroll out-of-state and international students to help offset lost tuition revenue. Could it be that free-college supporters draw the line for federal overreach at a national policy dictating universities' out-of-state enrollment policies?

Free-college proponents also seem unaware that state spending on public universities might erode over time under these policies despite access to additional federal funds. While states would be prohibited from cutting funding below current levels, none of the plans require that states increase their funding at all. Should state legislatures let funding for public universities stagnate for long periods, the educational quality could suffer. Stagnant funding might also cause them to reduce overall enrollment and then tighten their admission policies, reducing access to higher education, particularly for low-income students.

This is not mere theory. Data from the Organization for Economic Cooperation and Development show that countries with the most heavily subsidized university systems tend to have lower rates of degree attainment. Universities in these countries are beholden to the government for nearly all of their revenue, and there is significant competition for those funds. As such, total resources for higher education are more limited than if universities could charge tuition. And when resources are constrained, capacity at universities tends to shrink, leading to fewer degrees.

For example, Finland's universities are free, but they also reject two-thirds of applicants, a rate on par with only a handful of the most selective public institutions in the U.S. It is surely no coincidence that Finland scores well below average among developed countries in producing college graduates. Australia and England abandoned their free-college policies in the 1980s and 1990s, respectively, when it became clear that the selective admissions policies that tend to go hand in hand with free-college policies were preventing many students from earning degrees — and that most of them were from economically disadvantaged backgrounds. Their decision to charge tuition, it turned out, increased resources available to universities, which allowed them to increase access to higher education with more seats and targeted student aid, especially to students from historically underserved populations. Both countries now rank near the top among developed nations for higher-education attainment.

Germany, which has gone in the other direction, offers additional warnings for free-college proponents. The country reinstated free tuition after briefly abandoning it in the mid-2000s, and while enrollment at universities subsequently increased, the government hasn't provided universities with a commensurate budget increase. Unable to charge tuition to cover the higher costs, universities are now "starved for funding," as higher-education journalist Jon Marcus put it. The result is overly crowded lecture halls, increased reliance on underqualified adjunct faculty, and woefully outdated infrastructure. And Germany still has low overall degree-attainment rates. Americans would surely bristle at these unintended consequences of free college. Like the Australians and English, they might even come to see tuition as a feature rather than a flaw, if it is coupled with targeted student aid.

A BETTER WAY

The biggest danger of free college is that many of the proposals abolish the existing student-aid system on the misguided premise that it has failed. Twenty years of data show that targeted financial-aid programs have kept average in-state tuition nearly constant for students from low- and middle-income families. Moreover, large increases in federal Pell Grants and tax credits for families during the Great Recession fully offset the effects that state budget cuts would have otherwise had on the tuition prices at public universities.

This suggests that the existing framework of financial aid is capable of solving the problems that the free-college proposals aim to address — keeping college affordable for those with the least resources to pay tuition. Reformers should consider incremental changes to this system instead of the radical transformation envisioned in the federal-state matching-grant approach. To be sure, this will require an increase in federal aid to students and families, and a further transfer of higher-education financing from states to the federal government. But that is far more moderate than the larger federal role that would result from a new matching-grant plan.

This approach also avoids the unintended consequences that are sure to arise under the matching-grant proposals. That is crucial given that some of those consequences run counter to the worthy goals that free-college supporters aim to achieve, such as greater access to high-quality higher education. Furthermore, incremental increases in the existing federal student-aid system would not preclude individual states from pursuing their own free-college programs tailored to their own populations, as some are doing now. It would actually make those policies easier for states to adopt by closing the distance to free tuition. Finally, all states are treated equally under today's system, which would not be the case under the matching-grant proposals. Students in states that opt not to provide free college would still qualify for any increase in federal aid, as it is not conditioned on new state policies.

Ultimately, free-college proponents want to move our higher-education system away from an approach that has worked well and that offers a sound foundation for incremental reforms. The secret behind much of its success is that it aims to charge families what they can afford for a college education. That should be a feature that reformers on the left and right strive to preserve.