A Federal-State Partnership for Higher Ed Funding

College costs and student debt continue to rise, and cuts in state funding for higher education have been a major reason why. The good news is that the federal government can play a key role in reversing these trends, making college more affordable for all.

Attending a public four-year institution costs 14 percent more now than in the 2006–07 academic year, after adjusting for the impact of inflation and grant aid. Meanwhile, 43 million borrowers owe more than $1.6 trillion in federal student loans. Not surprisingly, prospective college students and their parents identify debt and affordability as their biggest worries about college.

Moreover, students and families aren’t the only participants in the higher education system who are struggling financially. Most institutions of higher education have faced enrollment declines since the onset of COVID-19, leaving them with fewer tuition dollars. The end of the pandemic, however, will not reverse those declines. The aging of America’s population translates into a shrinking cohort of prospective 18- to 24-year-old students for years to come.

Lower state funding for higher education has been a major driver of rising college tuition costs. Despite recent increases, state funding per full-time equivalent student is still 10 percent below what it was 20 years ago—13 percent lower if federal stimulus money is excluded—and the majority of states fund higher education at a lower level than before the Great Recession of 2008–09.

Multiple recessions in recent decades have strained state higher education budgets: as state revenues fall during a recession (with struggling businesses and individuals paying less in taxes on their declining incomes), state policy makers eye cuts in higher education funding to help them balance their annual operating budgets—as they are required to do. Once in place, such cuts can remain in place so long that they become essentially permanent.

With all that in mind, a flexible federal block grant is the best way to invest in college affordability and address the problem of state funding cuts. Under our proposal, outlined here in a Bipartisan Policy Center report titled “A Moderate Alternative to Free College,” the federal government would create an annual, multibillion-dollar grant program. A state would receive $4 in federal funds for every $1 it invests in its higher education system above the average of its higher education spending over the previous three years. The federal government would place some of the new money into “rainy day funds” from which states could draw during recessions to offset the impact on higher education spending of lost state tax revenues.

Our proposal would also enable governors to direct funding toward improving college affordability and student outcomes for low- or middle-income students. States, for example, could increase direct aid to public institutions to reduce tuition prices, invest in free college, or Promise, programs, or support evidence-based interventions that improve student outcomes. Each state would retain its role as the main driver in shaping its higher education system and building customized solutions that work for its population.

The benefits of this proposal would be substantial. First, states could directly reduce the price of college. Moreover, greater certainty around higher education funding could encourage states to make multiyear commitments on tuition pricing and grant aid, for instance enabling institutions to commit to a guaranteed tuition price and aid package for the duration of a student’s enrollment. This would meaningfully address the worries that prospective college students have about affordability and give students who have already enrolled the resources they need to graduate. By encouraging states to increase their own spending on higher education and by supplementing that funding with new federal dollars, this program would put both students and institutions in a stronger financial position.

A BPC analysis found that investing $5 billion annually in college affordability via a flexible federal block grant program would increase college enrollment by more than 200,000 and college completions by more than 50,000. These completions, in turn, would generate substantial economic benefits that would partially offset the cost of the program.

Americans broadly support the idea of additional public investment to make higher education more affordable. A 2021 survey commissioned by BPC found that 72 percent of Americans, including 85 percent of Democrats and 61 percent of Republicans, support the idea of the federal government and the states acting as financial partners to reduce tuition prices for students. Last year, U.S. senators Jack Reed, a Democrat representing Rhode Island, and Susan Collins, the Republican representing Maine, cosponsored bipartisan legislation to create a similar partnership.

Policy makers can and should come together across party lines to make college more affordable for the sake of students, communities and the economy.