State appropriations and undergraduate borrowing: more debt, less money

ABSTRACT

When state appropriations decrease, public universities respond by raising tuition. Students borrow more in response to both tuition increases and appropriation cuts. This article investigates the feedback of how borrowing and tuition influence state appropriations. Using a panel data set of 450 four-year public universities from 1999 to 2012, we employ three-stage least squares techniques to control for the endogeneity between state appropriations, tuition and student borrowing. There is evidence that state policy-makers respond to increases in university tuition and student borrowing by decreasing future appropriation levels. After controlling for the effect of appropriations on tuition and borrowing, a one-dollar increase in student borrowing reduces state appropriations per student by $0.06, and a one-dollar increase in tuition results in a decrease of $0.45 in state appropriations per student. When universities increase tuition for reasons other than a reduction in state appropriations, policy-makers respond with a significant cut in future appropriations which could signal an incentive strategy.

KEYWORDS:

• Higher education
• student debt
• state appropriations
• tuition
• public universities

JEL CLASSIFICATION:

• I22
• I28

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Table 333.10. Digest of Education Statistics, U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System. http://nces.ed.gov/programs/digest/d14/tables/dt14_333.10.asp (last accessed 12 June 2015).

² Results of the three-stage least squares regressions without the school and year fixed effects were omitted due to space constraints but are qualitatively similar and available from the authors upon request.