The ANNALS of The American Academy of Political and Social Science-2013-Barr-168-93

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Expanding Enrollments and Contracting State Budgets: The Effect of the Great Recession on Higher Education
Andrew Barr and Sarah E. Turner The ANNALS of the American Academy of Political and Social Science 2013 650: 168 DOI: 10.1177/0002716213500035 The online version of this article can be found at: http://ann.sagepub.com/content/650/1/168
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The Annals of the American AcademyExpanding Enrollments and Contracting State Budgets
Expanding Enrollments and Contracting State Budgets: The Effect of the Great Recession on Higher Education
The Great Recession heightened a growing conflict in the United States between expanding enrollments in postsecondary education and contracting public budget support. Weak labor market conditions during the Great Recession encouraged college enrollments, with much of the increase in enrollment occurring outside the most selective institutions. While federal aid policies, including the Pell grant, became more generous, dramatic reductions in state budget allocations made it difficult for colleges and universities to maintain programming and accommodate student demand. As a result, the Great Recession has accelerated the costshifting from public subsidies to individual payments in higher education. Keywords: Great Recession; higher education
ven as demand for many goods and services tends to decline during a recession, demand for postsecondary education tends to increase. Indeed, enrollment increases during the Great Recession have been particularly evident.1 Total enrollment increased from 18.2 million to 21 million between fall 2007 and fall 2010 (Snyder 2012, Table 198). In turn, enrollment increases have occurred across age groups: between 2007 and 2010 the postsecondary enrollment rate increased from 48.7 percent to 50.8 percent for those ages 1819, from 30.5 percent to 32.6 percent for
Andrew Barr is an economics graduate student at the University of Virginia and is affiliated with the universitys Center on Education Policy and Workforce Competitiveness. He is a recipient of both National Academy of Education/Spencer Foundation and NSF/ AERA dissertation fellowships. Sarah E. Turner is University Professor of Economics and Education at the University of Virginia and a research associate with the National Bureau of Economic Research. Her research focuses on both the supply and demand sides of the higher education market, with particular attention to student aid policies and college choice.
DOI: 10.1177/0002716213500035
By AndreW Barr and Sarah E. TUrner
168 ANNALS, AAPSS, 650, November 2013

EXpanding EnrollMents and Contracting State BUdgets
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those 2024, and from 6.7 percent to 8.5 percent for those in the 2530 age group.2 Yet even as enrollment demand has increased during the Great Recession, the overall budget situation for public and nonprofit colleges and universities has eroded dramatically. State appropriations declined markedly, while private endowments lost substantial capital. For example, state appropriations to higher education fell from $75.3 billion in 2007 to $73.8 billion in 2010. There is also considerable heterogeneity among colleges and universities in the United States in terms of sources of funds and how these resources have been affected by the fiscal crisis. For example, while well-endowed institutions faced a significant hit to assets and liquidity at the start of the Great Recession, such shocks have proven to be relatively transitory (S. Turner 2013). In contrast, those institutions receiving substantial state appropriations have faced more extended cuts in funding while also facing significant limitations in the capacity to raise alternative revenues through increased tuition charges. A striking feature of the Great Recession is the relative shift from state support and provision of higher education to private and federal support along two margins. First, while only about 6.5 percent of postsecondary students were enrolled in for-profit institutions in fall 2007, nearly 30 percent (more than 730,000 students) of the increase in enrollment from that time to 2010 occurred at private for-profit institutions. Second, for public colleges and universities faced with declining state appropriations, increased tuition has served as one of the few channels for revenue generation. Tuition increases at public universities were marked during the period of the Great Recession and such increases shift the costs of higher education from states (in the form of across-the-board subsidies) to students. Yet not all the increases in tuition have accrued to students in the form of increases in the net price of college. Federal aid for higher education, largely in the form of increased generosity of Pell grants and tuition tax credits, has served a partial role of fiscal stabilizer. Indeed, increases in federal aid served to buffer some of the effect of institutional tuition increases (though it is likely that some of the tuition increases are endogenously related to federal aid).3 At most public institutions, the combination of declining state support for higher education and increased enrollment demand generated declines in resources per student associated with the Great Recession. These changes have been particularly concentrated among community colleges and open-access fouryear institutions, essentially widening stratification in higher education. Our analysis begins with an overview of the enrollment response to the Great Recession: we show the cyclicality in this downturn in the context of prior recessions and demonstrate the concentration of this response in particular sectors. We also compare the enrollment response of traditional-age individuals with older individuals likely to have accumulated some labor market experience. In the second section, we present an overview of adjustments in federal policies, including changes in the generosity of the Pell grant program and tuition tax credits, which impact the net cost of college. The third section examines changes in institutional revenue sources, including state appropriations and tuition policies.
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THE ANNALS OF THE AMERICAN ACADEMY
Enrollment Responses in the Great Recession

Overall cyclical enrollment demand
Unlike many goods, the demand for higher education typically increases during economic downturns. In periods of high unemployment or recession, the opportunity cost of time is lower. Yet increases in enrollment may be limited if potential students are credit constrained.4 Combining this with declining public support for colleges and universities leads to a theoretically ambiguous cyclical enrollment response. Figure 1 shows the overall trend in college enrollment in relation to the unemployment rate. The top panel illustrates the secular increase in college enrollment in recent decades while the bottom panel shows the change in enrollment net of the secular trend. Vertical lines indicate the formal periods of recession. Enrollment responds in both ratesdefined as the share of the 1840 population participating in collegeand levels, represented by the number of students enrolled. While the magnitude of the employment effects in the Great Recession has been well documented, the rise in enrollment is noteworthy. Between 2007 and 2010, total enrollment increased by nearly 2.76 million students, with about 66 percent of these students enrolled full-time; during the more modest cyclical downturn between 2000 and 2002,5 enrollment increased by about 1.3 million students. (Regression evidence provides some indications that the enrollment response to the Great Recession is greater than in prior cyclical downturns; we discuss this finding [and its explanation] in more detail below.) Enrollment among women outnumbered male enrollment in this expansion, with the 2007 2010 increase for women at 1.539 million relative to 1.228 for men, though this is consistent with the now well-known overrepresentation of women in college education. The increase in enrollment of black and Hispanic students has been marked, as well.6 The share of students enrolled as undergraduates remained stable at about 86 percent, as did the share of first-time degree seeking students, at about 15 percent (Snyder 2012, Table 207). Significantly, much of the increase in college enrollment has historically come from students outside the pool of recent high school graduates (Betts and McFarland 1995; Christian 2006; Barr and Turner 2013). There is far less evidence to draw on with respect to the question of how recessions affect college choice among inframarginal students. There is some evidence to suggest that fiscal downturns may lead moderate-income students who are unlikely to be eligible for financial aid to shift from private colleges and universities to public colleges and universities, though such effects are not well established.
Cyclicality of enrollment demand by age

Using micro data from the U.S. Census and Current Population Survey (CPS) files, prior empirical analyses of the educational investments of youths show that the unemployment rate has a large effect on high school graduation, a modest effect on college enrollment, and no effect on college degree attainment (Kane
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FigUre 1 College Enrollment Rate by Year
NOTE: Fraction enrolled calculated as the (weighted) proportion of individuals 1840 years old enrolled during October of each year using the October Current Population Survey (CPS). Enrollment detrended using a linear trend.
1994; Card and Lemieux 2001). These analyses typically take advantage of within-state variation over time in the unemployment rate, as well as other measures such as state tuition and cohort size.7 For these papers, the primary focus is on the economic conditions facing youths at the end of high school, or the typical college-going ages.
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FigUre 2A College Enrollment by Year
NOTE: Fraction enrolled calculated as the (weighted) proportion of individuals 1819 enrolled during October of each year using the October CPS. Enrollment detrended using a linear trend.
Yet those most likely to seek postsecondary training in response to cyclical shocks are outside the set defined as traditional BA degree-seeking college students. While short-term labor market fluctuations are likely to leave unchanged whether a young person pursues a BA degree (most degree-seeking students will be inframarginal), recessionary conditions may have a substantial impact on the returns to relatively short-duration enrollment and training opportunities, and many students who choose to pursue such options are older than recent high school graduates. Moreover, given the secular increase in the postsecondary participation of older students since the 1970s, the enrollment response of older students is of substantial quantitative significance. While 74 percent of enrolled students were between the ages of 18 and 21 in 1970, recent data show that only about 54 percent of undergraduate students are of traditional college age.8 To understand the overall distinctions in enrollment cyclicality by age, we begin by presenting the (detrended) series of enrollment rates by age. Figure 2A shows enrollment for 18- to 19-year-oldsa group most likely composed of recent high school graduates; Figure 2B shows the rate for 20- to 24-year-olds; and Figure 2C the rate for those in the 2530 age rangea group that likely includes many individuals with some labor market experience. In all three age groups, the broad correlation between changes in unemployment rates and changes in enrollment is evident for the last two decades, while this connection
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FigUre 2B College Enrollment by Year
NOTE: Fraction enrolled calculated as the (weighted) proportion of individuals 2024 enrolled during October of each year using the October CPS. Enrollment detrended using a linear trend. FigUre 2C College Enrollment by Year
NOTE: Fraction enrolled calculated as the (weighted) proportion of individuals 2530 enrolled during October of each year using the October CPS. Enrollment detrended using a linear trend.
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Table 1 Unemployment Rate and College Enrollment Sample Age 1819 UNEMP. RATE (UR) Age 2024 UNEMP. RATE (UR) Age 2530 UNEMP. RATE (UR) State Trends N Mean (DV) .43 19782011 .00186 (.00185) .000592 (.00112) .000206 (.000510) No 1,612,145 19782011 .00110 (.00177) .00240** (.00105) .000845 (.000633) Yes 1,612,145 20042011 .00939** (.00389) .00893** (.00341) .00254* (.00128) No 319,782
.26
.06
NOTE: All specifications include year and state fixed effects as well as indicator variables for gender, race, and age. All ages include individuals age 1840. Means presented for 19782011. Corresponding means for more recent sample period are .145, .49, .32, . [.07] 07, and .03, respectively. Robust standard errors clustered at the state level are in parentheses. *Significant at the 10 percent level. **Significant at the 5 percent level.
is much harder to see in the early 1980s. Focusing on variation within states over time, which makes explicit use of the different local dimensions of cyclical shocks, we regress enrollment on the statelevel unemployment rate. We compare the enrollment response during the recent period (20042011) with that observed over the last three decades9 (Appendix Figure A1 provides a sense of the differences in unemployment rate changes among states). Starting with the long horizon in Table 1, we find that the aggregate cyclical effect is quite weakoccasionally statistically different from zero and on the order of a tenth of a percentage point per point change in the state unemployment rate. Focusing on variation prior to and during the most recent cyclical downturn suggests a very different dynamic: a 1-point increase in the unemployment rate increases the probability that an individual is enrolled by a third of a percentage point. Table 1 presents these results by age for the extended period from 1978 and the decade leading up to and including the Great Recession. Unambiguously, the coefficients are larger when we focus on more recent years.10 While the magnitudes of the coefficients are somewhat larger for younger students, the implied relative change is greater for students in their 20s. To illustrate, a within-state change in the unemployment rate of 5 percentage points predicts a 17 percent increase in enrollment for those ages 2024 and a 12 percent increase for those ages 1819.
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Cyclicality of enrollment demand by type of institution

A different approach to measuring the enrollment response to the Great Recession is to use data on headcount enrollments compiled from institutions in the Integrated Postsecondary Education Data System (IPEDS) surveys that the Department of Education maintains. Given the great variation in collegiate institutions in the United States, it is natural to expect substantial variation in the response to cyclical enrollment shocks. Research universities and liberal arts colleges are most likely to be supply inelastic, responding only modestly to changes in enrollment demand. With many residential programs and substantial subsidies per student, these institutions may be limited in capacity to respond to transitory changes in enrollment demand. In contrast, community colleges and open-access four-year institutions may be particularly well positioned to adjust enrollment to the extent that they are able to hire nontenured faculty to meet core teaching obligations and do not need the infrastructure of residential dorms since most students live at home. What is more, these institutions may offer the types of relatively short-term career and technical programs that are in the greatest demand among nontraditional students. Indeed, writing more than 15 years ago, Betts and McFarland (1995) find large cyclical responses in public community college enrollments to changes in local unemployment rates. Given that more than half of community college enrollments are typically drawn from students over the age of 22, this finding is consistent with a relatively high enrollment elasticity among nontraditional students. When we examine the distribution of enrollment by type of institution, it is unsurprising that the largest share of the increase over the 20072010 interval occurred in community colleges where enrollment increased by nearly 900,000 students, or more than 32 percent. Public four-year institutions also had sizable enrollment growth, accounting for about 27.4 percent of additional students. While nonprofit four-year institutions, including research universities and liberal arts colleges, accounted for nearly 20 percent of postsecondary enrollment in 2007, these institutions absorbed about only 10 percent of the students induced to enroll with the Great Recession.11 What is particularly strikingand different than in prior recessionsis the share of the additional enrollment occurring in for-profit institutions. The two-year and four-year institutions (combined) in the for-profit sector absorbed nearly 30 percent of the enrollment growth during the Great Recession.12 In some states, substantial cuts in community college funding likely drove students to enroll in for-profit institutions.13 While the size of the for-profit sector more than doubled from 2000 to 2007, growth of online offerings and enrollment at multisite institutions, such as the University of Phoenix, accelerated during the Great Recession (Deming, Goldin, and Katz 2012). There are several possible explanations for the relative growth of the for-profit sector. First, for-profits may have more institutional flexibility than public institutions, allowing the former to hire temporary staff and rent additional facilities in response to increased demand, whereas the latter may be subject to more rigid administrative practices (S. Turner 2006). Second, for-profits may specialize in career and technical training that may be in particularly high demand among
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older students and dislocated workers. Finally, declines in funding at public institutions (primarily community colleges) may induce entry and expansion among for-profits. Cellini (2009) provides credible causal evidence to this point, showing that the enrollment increase at community colleges (and relative decrease at forprofits) is associated with increased funding from the passage of bond referenda to support community colleges.
Federal Student Aid and Labor Market Policies That Affect Enrollment
During the years immediately prior to and at the beginning of the Great Recession, federal student aid became more generous (unlike cyclical downturns in the 1980s and early 1990s). For this reason, federal funding served the role of stabilizer in the face of substantial contractions in state appropriations and other sources of direct institutional support.
Federal aid and enrollment of low-income students

The Pell grant program is the foundational means-tested grant aid program funded by the federal government to help low-income students finance undergraduate education. Since its inception as the Basic Educational Opportunity Grant program in 1972, the Pell program has had explicit provisions for independent students as well as dependent students for whom need is determined by parental circumstances.14 While the maximum Pell grant increased moderately in advance of the Great Recession, the American Recovery and Reinvestment Act (ARRA) included substantial increases in the generosity of the Pell grant award. Not only did the real value of the Pell grant increase from $4,675 to $4,859 (2011 dollars) between 20072008 and 20082009, but it also increased again between 20082009 and 20092010 to $5,613, representing $5,500 in nominal terms (Trends in Student Aid 2012). Note that this increase places the real value of the Pell above the 19761977 level of $5,539 after considerable erosion in the mid1990s. As a point of note, the real value of the Pell grant has increased in the two most recent cyclical downturns while economic downturns of the 1980s were accompanied by erosion in the real value of the Pell grant (see Figure 3). Indeed, there is some evidence that the enrollment response in the Great Recession has been somewhat greater than in prior cyclical downturns, which may be partially explained by a jump in the generosity of federal Title IV funding (including the increase in the maximum Pell grant). The increase in the number of Pell grant recipients has been marked, rising from 5.5 million in 20072008 to 9.3 million in 20102011, before leveling off at 9.4 million in 20112012 (Trends in Student Aid 2012). In turn, constant dollar expenditures on the program increased from $15.9 billion in 20072008 to $37 billion in 20102011. Cyclicality in the number of Pell grant recipients provides a perspective on how enrollment among the most economically disadvantaged responds to local
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FigUre 3 Real Value of the Maximum Pell Grant by Year
NOTE: Maximum Pell amounts deflated using the Consumer Price Index.
labor market shocks and the extent to which the Pell grant serves a stabilizing role. As an empirical point, Pell grant receipt within a state is strongly countercyclical, and the magnitude of this effect appears to be somewhat larger during the Great Recession than in prior cyclical downturns. Regression of the log of Pell grant recipients on the state level unemployment rate net of year and state fixed effects shows the strong cyclicality in Pell receipt, with a 5-point increase in the unemployment rate resulting in a 15 to 20 percent increase in Pell receipt (see Barr and Turner 2013). It is worth emphasizing that this estimate captures several different effects beyond enrollment adjustments specific to low-income students. First, economic downturns likely increase the number of Pell-eligible students among inframarginal students, as students who would not have been Pell-eligible before the recession find that family or individual economic circumstances push them into eligibility. In addition, institutional policies may have shifted to increase Pell eligibility during the downturn (e.g., the increased use of professional judgment for job losers). Using more detailed data from 2004 2010, relative to independent students we find a notably large response among dependent students, with a 5-point increase in the unemployment rate leading to a 25 percent increase in the number of dependent Pell recipients. However, this result is likely driven by a stronger response to changing labor market conditions among low-income dependent students. Splitting our sample from the CPS by income and examining the enrollment response of individuals 1819 years old (who are predominately tied to their parents household income) suggest that this
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is indeed the case; individuals with household incomes less than $40,000 are nearly twice as responsive to changes in unemployment as their more affluent peers. The increased generosity of the Pell program is likely one factor in the relatively large enrollment gains for low-income students.
Tuition tax credits

A substantial part of ARRA (which has been overlooked in the discussion of the extraordinary growth of the Pell program) is the introduction of the American Opportunity Tax Credit (AOTC), which replaced the less generous Hope Credit that dated from 1997.15 The key features of the AOTC are that it is worth $2,500 per year ($1,000 refundable), and it is available for up to four years, while the Hope credit had a maximum of $1,800 and was available for only two years. The AOTC not only raised the annual credit from $1,800 to $2,500 but also expanded the credit to higher- and lower-income taxpayers by expanding the phase out range and adding a provision for refundability. The AOTC is available to many moderate income tax payers, with phase outs between $80,000 and $90,000 of modified AGI or between $160,000 and $180,000 for married joint filers (Ackerman et al. 2011). The increase in tax expenditures for higher education associated with the Great Recession has been notable, rising from $7.2 billion in 2008 to $11 billion in 2009 and then peaking at $18.4 billion in 2011 (Trends in Student Aid 2012). A distinguishing feature of the most recent recessionary period is the extent to which the generosity of federal financial aid programs such as Pell, but also tuition tax credits, increased at the start of the cyclical downturn.16
Student loans and student borrowing

In addition to grant aid, loans provide capital for students. Not only would we expect the increased demand for higher education to contribute to borrowing, but the near evaporation of private lending markets during the credit crisis likely generated substitution away from private sources of credit (including home equity) toward student borrowing. We observe a dramatic fall in nonfederal borrowing combined with a substantial rise in federal borrowing. The largest component of the increase in federal borrowing is in the unsubsidized Stafford loan program, with the number of borrowers jumping markedly between 20072008 and 20082009 from 3.8 million to 7.145 million and annual loan volumes increasing from $38 billion to $51 billion, then leveling off at about $61 billion in 20102011. Between 20062007 and 20072008, the maximum that first-year undergraduate students could borrow under the Stafford program increased from $2,625 to $3,500 for dependent borrowers (both subsidized and unsubsidized) and from $6,625 to $7,500 for first-year independent borrowers; in addition, the cumulative undergraduate loan limit for unsubsidized undergraduate borrowing increased from $23,000 to $31,000 for dependent students and from $46,000 to $57,500 for independent students (Wei 2010, Table 2).17
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Table 2 Unemployment Rate, and Log Appropriations and Log Tuition Dependent Variable LOG APPROPRIATIONS (per student) LOG TUITION (PUBLIC 2-YEAR) LOG TUITION (PUBLIC 4-YEAR) State trends 19782010 .0354*** (.00268) .0228*** (.00332) .0291*** (.00250) Yes 20042010 .0382*** (.00698) .0126** (.00606) .0234*** (.00458) No
NOTE: All specifications include year and state fixed effects. Observations are the log of the real appropriations per public school student (2010$) and the log of real tuition (2010$) at the state-year level. Robust standard errors in parentheses. **Significant at the 5 percent level. ***Significant at the 1 percent level.
However, it is important to remember that federal lending for higher education is not a complete measure of total lending for postsecondary education. The growth in federal student loans may overstate the true increase in borrowing for students to attend college, if the increase in Stafford loans supplanted other types of loans, which may have been a relatively cheap source of credit for parents before the financial crisis. Notably, private student loans have decreased as a percentage of total student loans, from a high of nearly 26 percent during the 20062007 school year, during the student lending boom of 20052008, to 7 percent during the 20102011 school year.18 Although 14 percent of all undergraduates have taken out private student loans, 46 percent of students at four-year for-profit universities have them,19 while the percentages for students attending four-year public universities and private nonprofit universities are only 5 percent and 18 percent, respectively.20 In general, the percentage of private borrowers is highest for those attending for-profit and four-year institutions and lowest for those attending public and two-year institutions. The percentage of private nonprofit school students falls in between for-profit and public. A critical difference between federal and private loans is that private loans are not capped. While maximum yearly loan amounts for Stafford loans range from $5,500 to $12,500, depending on year of study and dependency status, banks issuing private loans are not constrained by these amounts. Overborrowing, in the sense that the student borrows more than the Expected Family Contribution, occurs more often when private lenders issue their loans Direct to Customer (DTC) rather than through an educational institution, which do not always certify the loan amount needed through the college or university.21 The Consumer Financial Protection Bureau identifies exaggerated estimates of cost of attendance as a major problem, with students having borrowed upwards of 175 percent of tuition costs with these
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loans during the 20052008 lending boom.22 During this time, the credit quality of students borrowing through DTC avenues was significantly worse than those issued through schools; loans issued through DTC avenues typically go into default at a rate 1.5 times that of loans issued through schools.23 In the wake of the credit crisis, better lending standards may produce fewer cases of extreme borrowing, but these less extreme cases often receive less media attention.24
Labor market policies and college enrollment in the Great Recession

In addition to the federal student aid programs targeted at reducing direct college costs, Unemployment Insurance (UI) and other active labor market programs, including services provided under the Workforce Investment Act (WIA), had a substantial impact on college participation during the Great Recession. Because UI program parameters are determined at the state level, there is considerable variation among states in the postsecondary programs in which an individual can enroll while continuing to receive UI. In some states such as Alabama or South Carolina, only explicitly vocational programs meet eligibility criteria, while in other states such as Delaware or California, virtually any undergraduate program qualifies. One policy concern surfacing early in 2009 was that many unemployed workers did not know of their eligibility for Pell grants and other financial aid to finance training while unemployed. In May 2009, President Obama announced a program to encourage education and training for displaced workers. The federal Departments of Education and Labor joined together to promote Pell grants for the unemployed and changed state policies regarding simultaneous receipt of federal financial aid and UI benefits. In addition to promotion at the national level through Opportunity.gov, states were encouraged to send letters to those receiving UI benefits to increase awareness of the program. Roughly forty states had sent or were in the process of sending these letters by the end of 2009 (National Association of State Workforce Agencies 2010). Beyond variation across states in the definition of qualifying training and Pell awareness, the expected length of UI coverage likely impacts decisions to pursue postsecondary training. With extended UI duration, an individual can plan a training investment with reduced concerns about credit constraints impeding his or her capacity to finish the program. When UI recipients are able to enroll in postsecondary education as part of the programs approved training provision, the duration of UI likely impacts enrollment decisions. During the Great Recession (and after), there have been substantial increases in the duration of UI benefits, which went substantially beyond the basic Extended Benefit provisions. As Rothstein (2011) describes in considerable detail, a relatively ad hoc set of congressional authorizations eventually raised UI benefits as high as 99 weeks for displaced workers in some states. Barr and Turner (2013) find that the extension of UI by 10 weeks leads to an increase in enrollment of job losers by 2 percentage points, or roughly 20 percent.
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FigUre 4 Public Educational Appropriations per FTE and Overall, 19802010

$12,000 $10,000 $100 $90 $70 $60 $50 $40 Appropriaons per FTE Appropriaons (Millions), Right Axis Not Including Federal Smulus Funds, Right Axis $0 1981 1986 1991 1996 2001 2006 2011 $30 $20 $10 $0 $80
Constant 2012$
$8,000 $6,000 $4,000 $2,000
SOURCE: Trends in Higher Education (2012); Grapevine reports, Illinois State University (19782011); Snyder (2012, Table 227).
Funding for Higher Education Institutions during the Great Recession

Nontuition revenue streams in the Great Recession
While increased demand might be thought of as good news in most industries, increased enrollment often implies a greater challenge in covering expenses for colleges and universities. For public and nonprofit colleges and universities, tuition revenues cover only a portion of college and university operating expenditures. At public universities, subsidies from state appropriations account for a substantial share of educational expenditures (though the share of revenues accounted for by state appropriations has declined in recent decades). In turn, some nonprofit universities and selective liberal arts colleges often cover a substantial share of operating expenditures with earnings from endowment. The Great Recession dealt a dramatic blow to both sources of nontuition revenue. Overall, constant dollar state appropriations to higher education fell by 17 percent from the 20072008 to 20112012, from $87.7 billion to $72.5 billion as shown in Figure 4. Because enrollment increased at public institutions, this amounted to an even larger decline on a per student basis, with appropriations per student falling from about $9,000 to $6,651 (constant 2012 dollars; Trends in College Pricing 2012). Notably, the declines in appropriations per student continued well beyond the official end of the Great Recession, falling nearly 10 percent from the 20102011 level of $7,321. One factor in this decline is the shift in the distribution of student enrollment toward institutions such as community colleges with relatively low per-student subsidies.
Millions, Constant 2012$
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To be sure, there is a long history of cyclicality in the fluctuations in appropriations per full-time equivalent (FTE). Indeed, because nearly all states are required to balance their budgets, it is very difficult for states to smooth cyclical downturns in appropriations even as it may be desirable to fund higher education countercyclically since credit constraints are likely to be exacerbated in economic downturns. The combination of tightening labor markets, the collapse of housing markets, and overall reductions in wealth driven by the Great Recession resulted in shrinking state tax revenues as the bases for income, corporate, and sales tax fell. An increased reliance on income taxes, changes in the set of items subject to sales tax, and reduced diversity of the tax base resulted in higher volatility in tax revenue during the last decade (see Campbell and Sances, this volume). As in all recessions, states were hit to different degrees based on their mix of industries. States with relatively large natural resource reserves (e.g., Alaska, North Dakota, and Montana), and thus more heavily reliant on severance taxes, experienced only small changes in tax revenue, while essentially all other states faced sizable budget gaps by fiscal year 2010. Still, as tax revenues shrank, demand for many state services, including Medicaid, continued to increase. Faced with budget shortfalls, states were forced to cut spending or raise taxes. Nearly every state reduced real spending before the Great Recession and beyond. After K-12 education and health care, higher education is the largest component of state spending. However, unlike the other two, spending on higher education is relatively free of funding mandates or matching requirements to receive federal dollars. This made higher education funding an appealing target for spending cuts; between 2008 and 2011, thirty-four states cut K-12 spending and thirty-one cut health care spending, while forty-three cut spending for higher education, including stimulus funds from the federal government (Johnson, Oliff, and Williams 2011). As Delaney and Doyle (2007) and Kane, Orszag, and Gunter (2003) discuss, a disproportionate reduction in higher education spending is not a new strategy. Increases in entitlement (Medicaid) and nondiscretionary spending (pension plans) over the last decade and the sentiment that universities can make up lost revenue through higher tuition have made cuts to higher education a popular response to budget gaps.25 In Table 2, we examine the relationship between labor market contractions and appropriations in a regression framework. Controlling for state and year fixed effects, we find a strong relationship between changing state labor market conditions and appropriations; a 5-point increase in the unemployment rate results in a 20 percent reduction in appropriations for higher education, including stimulus funds.26 Through the ARRA, the federal government attempted, and partially succeeded, to smooth state funding for health care and education services, providing nearly one-third of state general fund spending in 2009 and 2010. With the money provided by the State Fiscal Stabilization Fund, effective cuts to higher education were substantially lessened.27 However, by fiscal year 2011, federal support was reduced, resulting in additional reductions in funds available to state institutions of higher education.
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In addition, as endowments shrank markedly, institutions that relied substantially on this source of nontuition revenue faced substantial shocks. The timing of the decline in endowment returns actually modestly preceded the decline in state appropriations, suggesting that the impact of the fiscal crisis started somewhat earlier for endowment-dependent private institutions than for public institutions dependent on state appropriations. While 20072008 saw a local peak in appropriations, endowment income started its slide in the same year, only to fall dramatically in 20082009. Notably, the decline in endowment returns was not permanent and endowments have largely recovered in the two most recent years. State appropriations continue to slide on an aggregate level as well as a per student basis. Appropriations from state sources, as well as from private endowments, allow colleges and universities to provide institutional financial aid and across-theboard subsidies. Over the course of the last several decades, there is evidence that student subsidies have increased at the most selective institutions (particularly in the private sector) while declining somewhat in the public sector (see Hoxby 2009; Bound, Lovenheim, and Turner 2010). An implication of declining state appropriations is that colleges and universities must either increase tuition or reduce the level of resources per student. For public universities, these funding cuts are layered on top of state funding mechanisms that were in disrepair prior to the recession (Kane, Orszag, and Gunter 2003). Kane, Orszag, and Gunter (2003) identify crowding out from Medicaid as one factor placing downward pressure on state higher education funding, while Rizzo (2004) identifies elementary and secondary education funding as another source of fiscal pressure on higher education. The evidence is clear that pressure to reduce state funding on higher education started well before the financial crisis (Bettinger and Williams, forthcoming).
Cyclicality of tuition
As postsecondary appropriations are cut in response to the recession, one response of public institutions is to raise tuition. The increases in tuition at public institutions were sharp between 20082009 and 20092010, rising 10 percent ($2,470 to $2,720) for public two-year institutions and 9.3 percent (from $6,860 to $7,500) for public four-year institutions (Trends in College Pricing 2012). The increases have continued, albeit at a slightly slower pace but still well above the rate of inflation, with increases of 6.7 percent and 4.6 percent in the two subsequent years for public four-year institutions, and 5.5 percent and 4.5 percent for public two-year institutions (see Figure 5, which compares indexed tuition changes by type of institution). Notably, changes in the sticker price at public institutions have been particularly marked at public flagship universities, which are perceived to be the closest substitutes for private institutions and likely draw students with reasonably high capacity to pay. To illustrate, five flagship universities (University of California, Berkeley; University of Florida; University of Georgia; University of Washington; and University of Arizona) posted five-year in-state tuition increases of more than 60
184
FigUre 5 Undergraduate Tuition by Type of Institution
$10,000 $9,000 $8,000

Constant 2012$
Public Four Year (Le Axis)
$35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000
Public Two-Year (Le Axis)
$7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 1990
Private Non-Prot (Right Axis)
1995
2000
2005
2010
$0
NOTE: Trends in College Pricing (2012, Table 8). In-state tuition is shown for public colleges and universities.
percent (constant 2012 dollars). Notably, these states are among those that were most severely hit by the financial crisis. In Figure 6, we plot the percentage change in resident tuition at flagship institutions against the change in the state unemployment rate (20072011).28 As expected, flagships in states hit harder by the recession were more likely to enact substantial tuition increases, with a .54 correlation between the change in the unemployment rate and the change in tuition. Indeed, this response is by no means unique to the Great Recession; Figure 7 illustrates the pro-cyclical nature of tuition for public postsecondary institutions at the national level, while additional estimates from Table 2 confirm the relationship using state variation. A 5-point increase in the unemployment rate results in a 12 percent increase in tuition at four-year public colleges, almost double the increase in tuition at two-year public colleges. Tuition increases at private nonprofit institutions, which were largely unaffected by the erosion of state appropriations, were more modest over the same period. While their enrollment weighted tuition charges did rise by about 6 percent between 20082009 and 20092010 (from $25,850 to $27,380 in constant dollars)which is the year in which private institutions were most likely to be affected by endowment shocksincreases in subsequent years have been much more modest. Between 20092010 and 20102011, posted tuition increased by about 2.7 percent, followed by an increase of less than 1 percent in the next year. There are two constraints on further increases in tuition at private institutions:
185
FigUre 6 Resident Flagship Tuition and Labor Market Shocks (2007 to 2011)
SOURCE: Trends in College Pricing (2012, Table 6). NOTE: Both changes are measured from 2007 (i.e., 20072008 school year) to 2011.
FigUre 7 Net Price by Institution Type

$3,500 $3,000 $2,500 $2,000 Constant 2012 $ $1,500 $1,000 $500 $0 1990 -$500 1995 2000 2005 2010 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0
-$1,000 -$1,500 -$2,000
Public Four Year (Le Axis) Public Two-Year (Le Axis) Private Non-Prot (Right Axis)
SOURCE: Trends in College Pricing (2012, Table 8).
186
first, students are likely to be increasingly price-sensitive, potentially substituting public institutions for private institutions; and second, because many private institutions have substantial commitments to need-based aid or discount tuition markedly, increases in tuition often bring in far less than dollar-for-dollar increases in funding. A much smaller piece of the overall college landscape, four-year for-profit tuition rose dramatically, nearly 19 percent. With a high proportion of students eligible for federal need-based aid, there is good reason to believe that these institutions raise tuition to maximize revenue, consistent with the Bennett hypothesis (Cellini and Goldin 2012).
Net price
While the sticker price or posted tuition generally receives the most public attention, students and institutions should focus on different metrics. For students, the relevant price is the difference between posted price and financial aid or net price. Indeed, it is this net price measure that determines college affordability.29 In turn, for colleges and universities that offer substantial financial aid from institutional resources, the change in tuition revenue is likely to be less than any tuition increase. For public institutions, the need to make up for lost state appropriations while also providing financial aid to maintain opportunities for low-income students is a particular challenge. Focusing first on the net price paid by students, which is tuition and fees less grant aid (from state, federal, and institutional sources), we see that the increases are appreciably smaller than the changes in sticker price. Indeed, for students at public two-year institutions, the substantial increases in federal financial aid generate a sizable reduction in real net price, falling by $770 between 2008 and 2012 (see Figure 7). Similarly, students at private nonprofit institutions averaged a modest decline in net price (about $60). It is only for students at public four-year institutions that average net price increased over this interval (by about $570). Of course, one of the challenges in presenting data on average net price is that with demonstrated increases in sticker price and means-tested federal aid, it follows that some students (largely from affluent families) will face very large increases in college costs, whiles students from lower-income families may face larger reductions in net costs. Indeed, understanding how net price changes across the income distribution is particularly important, yet difficult. One open question is whether moderate income families may have been particularly squeezed in the Great Recession, as this group is likely to have experienced not only declining real income but also erosion in housing wealth. The sharp contractions of the Great Recession have accelerated the shift toward tuition dependence among public colleges and universities. For public colleges and universities, particularly in the four-year sector, another revenue lever is the mix of in-state and out-of-state students. Since out-of-state students generally pay much higher tuition, often approaching prices charged by
187
Table 3 Expenditures and Revenues by Type of Institution (2010$) Institution Type Public institutions Flagship Other research Other four-year Two-year Private institutions Research Other four-year Academic Year 0708 0910 0708 0910 0708 0910 0708 0910 0708 0910 0708 0910 Net Tuition $8,533 $9,320 $7,451 $8,305 $5,717 $6,332 $2,511 $2,692 $20,679 $20,917 $13,771 $14,084 Subsidy 9,687 8,912 7,774 6,858 6,292 5,485 6,038 4,982 18,789 18,338 3,518 2,979 Education Expenditures 18,220 18,231 15,224 15,163 12,010 11,817 8,549 7,674 39,467 39,255 17,290 17,063
SOURCE: Authors calculations using Delta Cost Project Database; see http://nces.ed.gov/ ipeds/deltacostproject/. NOTE: Averages represent 12-month FTE enrollment-weighted averages of net tuition, average subsidy, and education and related expenditures per 12-month FTE student.
private institutions, increasing the number of out-of-state students is one further mechanism to affect revenue flows. Indeed, we calculate that between 2007 and 2010, out-of-state enrollment increased by about 15 percent at state flagship institutions and by about 20 percent at other public research universities.30
Resources per student and subsidy per student

Public institutions differ markedly in their capacity to make up lost state appropriations with other sources of subsidy and tuition revenues. Table 3 shows total instructional expenditures, net tuition revenues (total tuition charges less institutional financial aid) and subsidy by type of institution for 20072008 and 20092010.31 While net tuition revenues increased by about 10 percent or $787 at flagship universities, the increase was much more modest at community colleges, rising only about $181 or 7 percent from academic year 20072008 to academic year 20092010 (see Table 3). Educational expenditures per student fell in real terms, on average, at community colleges from $8,549 to $7,674, as declines in the public subsidy per student outstripped the increase in net tuition revenues. In contrast, at flagship universities, real expenditures per student remained relatively flat over this interval.
188
Discussion: Implications in the Short Term and the Long Term

The Great Recession has produced unambiguous increases in college enrollment. It is, perhaps, too early to tell how this will translate to overall collegiate attainment, degrees conferred, and future labor market outcomes; but some evidence suggests it has translated into an increase in attainment in the short term.32 While Card and Lemieux (2001) demonstrate the effect of weak labor market conditions in prior economic downturns on young people having touched college, there is little evidence of their credit completion or degree attainment. A related question is the degree to which this additional human capital investment will translate into higher productivity and wages. In addition, some individuals may be able to avoid negative wage effects associated with entering a weak labor market (Kahn 2010). As more time passes since the official end of the Great Recession, these will be ripe areas for additional research. Not surprisingly, much of the increase in enrollment occurred in the sectors of higher education that are likely to be most elastic in supplycommunity colleges, open-access public four-year institutions, and for-profit institutions. As employment opportunities rebound, enrollment growth has leveled, and indeed, the Department of Education reports a modest decline in total enrollment between fall 2010 and 2011 after the addition of more than 2.2 million students between 2007 and 2010. While some of the enrollment changes brought about by the Great Recession are likely to be transitory, the Great Recession has likely also brought permanent structural changes in the financing of higher education. Even as the economy has recovered somewhat, state appropriations continue to slide, and few, if any, commentators anticipate that these subsidies will be restored to the pre-2008 levels. For example, Brit Kirwan (2010) of the University System of Maryland noted, We have, of course, experienced periods of fiscal decline in the past, one as recent as the early part of this decade. But, this decline has a different character. In the past, economic downturns were followed by periods of economic boom and losses were recovered relatively quickly. I know no one who predicts that will be the case with our current fiscal decline. A long-standing debate in the economics of higher education concerns the questions of who pays and who benefits from investments in colleges and universities. The Great Recession has led to a substantial change in the distribution of who pays for higher education. Among levels of government, we see a sharp erosion in states commitment to funding public higher education, and there is little evidence that this trend will reverse. At the same time, the federal commitment to financial aid increased markedly during the Great Recession, with the increases in Pell grants targeted to low-income students and increases in tuition tax credits extending further up the income distribution. Given looming budget battles, whether this federal commitment is maintained over a longer term is far from certain.33 In turn, as sticker prices increase, particularly in the public sector, it is increasingly clear that some families will be asked to pick up a greater share of the costs
189
of college education. The rise in unsubsidized borrowing is one indication that families are not able to cover these increased college costs from their savings. Whether this change in pricing structure has produced a middle-income squeeze is an open question, requiring somewhat more data to assess in full. With substantial differences among colleges and universities in their capacity to raise resources, the Great Recession has contributed to the widening in the differences in resources per student among institutions. As declines in appropriations are unlikely to be fully recovered through increased tuition at community colleges and public institutions outside of highly selective flagships, stratification in resources, and outcomes, may increase.
Appendix
FigUre A1 Cyclicality and Enrollment for Selected States
NOTE: Enrollment residuals from a regression of college enrollment on age, gender, and race indicators as well as year and state fixed effects for individuals ages 1830. Unemployment residuals from a regression of the state unemployment rate on year and state fixed effects. Selected states chosen as those experiencing relatively large (California, Florida, Georgia, North Carolina, Rhode Island, and South Carolina) and small (Alaska, Nebraska, North Dakota, Texas, Vermont, and Wyoming) labor market contractions during the Great Recession.
190
Notes
1. The NBER dates the most recent recession as the 18-month period from December 2007 to June 2009. Because of the protracted nature of the effects of the Great Recession, as well as the lag with which the crisis hits college and university budgets, we look more generally at changes occurring both during and after this time period. 2. U.S. Census Bureau and U.S. Bureau of Labor Statistics. Current Population Survey, October (2007 and 2010). 3. While there is evidence that increased availability of federal aid through grants increases tuition in the for-profit sector (Cellini and Goldin 2012), the evidence is mixed among public and nonprofit institutions (see, for example, N. Turner 2012; Long 2004). 4. For example, Lovenheim (2011) shows that, particularly for relatively low-income families, changes in housing wealth have a significant effect on enrollment. 5. Total enrollment actually fell slightly (by about 22,000 students) between 2010 and 2011. These data are from Snyder (2012, Table 198). 6. From 24.0 percent to 28.3 percent for those 2024 and from 7.2 percent to 9.0 percent for those 2530 (authors calculations using October CPS 2007 and 2010). 7. Using data from the UK, Clark (2011) finds that with measures of the youth labor market as the key explanatory variables, local labor market conditions have a substantial impact on the postcompulsory enrollment decisions of girls and boys. 8. Data from U.S. Census Bureau, Current Population Survey. Table A-7: College Enrollment of Students 14 Years Old and Over, by Type of College, Attendance Status, Age, and Gender: October 1970 to 2010, available from http://www.census.gov/hhes/school/data/cps/historical/index.html. 9. States have experienced very different cyclical variations in labor market conditions over time. For example, while the unemployment rate jumped from 6.5 percent to 10.1 percent between 2008 and 2009 in Ohio, the change in North Dakota was a strikingly more modest adjustment of 1 percentage point, rising from 3.1 percent to 4.1 percent. 10. We have estimated our basic and state trends enrollment-unemployment specification for all nine-year periods between 1978 and 2011. The enrollment-unemployment relationship is stronger between 2003 and 2011 than every other nine-year period between 1978 and 2006. There are only three significant effects found across these twenty-one sets of estimates. In contrast, for the four most recent nine-year periods, all estimates are greater than .0025 and statistically significant at least at the .05 level. 11. Official estimates using the 2010 CPS suggest individuals may not know what type of school they are attending, as 50.5 percent indicate they are attending a four-year public institution. 12. In earlier work, S. Turner (2003) shows that the for-profit institutions have long been more responsive than other sectors to expanding enrollment demand in cyclical downturns. Following a substantial increase in scope of the for-profit sector in the early part of the decade, the scale of the for-profit expansion is unprecedented. 13. See http://www.huffingtonpost.com/2011/12/30/community-college-for-profit-college_n_1174243. html?page=1 for discussion of the effects of funding cuts in California. 14. In earlier work, Seftor and Turner (2002) show that the introduction of the Pell program had substantial effects on the enrollment of students older than recent high school graduates. Since the programs inception, eligibility for aid as an independent student has become more restricted, limited to students over the age of 24 or those with dependents or military service. 15. The AOTC was extended through tax years 2011 and 2012 as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. 16. Changing eligibility and increased generosity of federal loan programs (in particular Stafford and PLUS loans) paralleled the changes in federal financial aid. 17. Student loan limits for borrowing from the Stafford program are set in nominal terms with limits tied to dependency status and class year, with either cumulative limits or annual limits potentially binding. Student borrowers eligible for the subsidized Stafford program are eligible to borrow the minimum of the loan limit or the cost of attendance less other aid and the expected family contribution. Cumulative subsidized Stafford borrowing increased from $17,250 in 19921993 to $23,000 in 19931994, which is the
191
current maximum. All studentsincluding those eligible and ineligible for subsidized Stafford loansare eligible to borrow additional funds from the unsubsidized Stafford program introduced in 1994. 18. Tabulations from Table 2: Total Student Aid and Nonfederal Loans Used to Finance Postsecondary Education Expenses in Current Dollars (in Millions), 196364 to 201011 (Trends in Student Aid 2012). 19. The three-year cohort default rate at for-profits (24.9) is substantially higher than that for private nonprofits (7.6) and public institutions (10.8) (Deming, Goldin, and Katz 2012). 20. Consumer Financial Protection Bureau (2012, 39). 21. Ibid., 2021. 22. Ibid., 25. 23. Moodys Investors Service (2011). See endnote 2. 24. See, for example, the May 12, 2012, front-page article in the New York Times, A Generation Hobbled by the Soaring Cost of College, which presented case studies of individuals overburdened by debt. While all the individuals referenced in the article had debt greater than $55,000, evidence from a study by the Federal Reserve Bank of New York finds that just 3 percent of students have debt loads above $100,000 while 90 percent of students have debt loads below $50,000. 25. Kane, Orszag, and Gunter (2003) suggest that the impact of increased Medicaid expenditures on spending for higher education is not limited to periods of economic contract; they note a longer-term trend where increased Medicaid responsibilities have crowded out higher education spending. Combined with the effect of the Great Recession, this has potentially important quality implications at public institutions of higher education. 26. There is a similar relationship between the unemployment rate and overall tax revenues (results not presented), suggesting the ARRA may have dampened the effect on appropriations somewhat when compared to previous investigations of this link. 27. Reestimating Table 2 after excluding stimulus funds gives a sense of the magnitude of the stimulus stabilizing effect. These estimates suggest that stimulus funds reduced cuts to higher education by a little over 10 percent. 28. Using the percentage change in the unemployment rate instead gives a similar picture. 29. Avery and Turner (2012) and Hoxby and Turner (2013) note that students from low-income families may be unaware of the full availability of financial aid and note that such information deficits may impede efficient college choice. 30. There is some evidence that suggests that public universities are actively increasing the number of out-of-state students by loosening caps. This appears to be a trend that began before the start of the Great Recession and was perhaps accelerated by budget cuts (Hoover and Keller 2011; Kiley 2012). 31. Note that these data are derived from the IPEDS data produced by the Delta Cost project. 32. The proportion of 25- to 28-year-olds with an associate degree or more rose nearly 3 percentage points from 2008 to 2010, after rising only 1 percentage point from 2006 to 2008. Similar increases in having touched college are observed (authors calculations using the American Community Survey). 33. Moreover, with most federal financial aid levels set in nominal terms, it is quite likely that there current level of support will erode in real terms absent congressional action.
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By AndreW Barr and Sarah E. TUrner

168 ANNALS, AAPSS, 650, November 2013

EXpanding EnrollMents and Contracting State BUdgets