New Research on How States can Control Tuition Growth

Last week, two universities in Michigan raised tuition significantly above the 3.2 percent limit set by the state legislature in 2013. But instead of facing steep consequences -- they will benefit financially from their decision.  Michigan lawmakers should have expected this outcome. According to a study released last month, legislators across the nation should take heed: decentralized tuition setting authority could be a contributing factor in rising public college prices. And contrary to conventional wisdom, state caps on tuition may also be counterproductive. Michigan was on the right track by creating incentives to keep tuition down, but poor policy design will now cost students and their families.

Eastern Michigan University and Oakland University broke no laws when surpassing the tuition cap. Universities are legally allowed to set tuition however they please according to the state’s constitution. But in an effort to limit tuition growth, legislators passed a law two years ago that in order to be eligible for any bonus in state funding, an institution must first comply with specified tuition limits. As punishment for violating these terms, Eastern Michigan University will lose all of its $1 million in additional state funding. But the withheld funds do not even come close to the $10 million the university stands to generate in additional revenue from its 7.8 percent tuition hike. Oakland with its 8.48 percent increase will get even more -- an estimated $12 million.

The consequences of Michigan’s decentralized tuition setting authority are not surprising. According to a study released in June by Mikyong Kim and Jangwan Ko, states with centralized tuition setting authority experienced smaller increases in tuition compared to states that give institutions full control. Using survey data from the State Higher Education Executive Officers Association (SHEEO), Kim and Ko compared tuition change from 1998 - 2007 at institutions in states where authority resided with a centralized authority like the legislature, a state coordinating agency, or a university system board versus the institutions themselves. Kim and Ko also categorized the way that states attempt to control tuition in three ways: caps (including freezes or curbs), incentives (extra state funding for keeping tuition low, auditing schools who raise tuition above an agreed upon percentage etc.), and tuition linked financial aid policies.

In states with central authority -- like the legislature/statewide agency or a university system board -- prices rose $2,349 and $2,668 respectively. On the other hand, in states with institution level authority, the average increase was significantly higher: $4,193. This research suggests that moving tuition setting authority to a central agency could be an important first step for lawmakers hoping to keep public college affordable.

While some Michigan legislators are probably thinking that a hard cap on tuition growth instead of voluntary guidelines could be a good idea, they might want to think again. Surprisingly, Kim and Ko found that states with tuition caps experienced higher tuition growth than states with no caps. Specifically, states with caps had an average growth of $2,923 or 96.9 percent from 1998 to 2007. Whereas tuition in states without caps rose 79.9 percent and $2,539 -- $400 and 17 percent less -- during the same period. One possible reason for this surprising difference could be that percentage caps compel institutions to increase tuition to the maximum level permitted. And if a cap on the rate of tuition growth is seven, eight or ten percent, as it is in some states, many institutions could raise tuition far above the rate that they might have otherwise.

The good news is that Michigan’s current system of tying tuition to increased state funding may be effective if and when the incentives to keep down tuition increases are larger. Kim and Ko found positive links between tuition setting policies designed around incentives and lower tuition; these policies were correlated with an average 13.6 percent lower rate of growth in tuition. But strengthening incentives and reinvesting state dollars will be a critical part of the equation in Michigan. The president of Oakland University, George Hynd, reportedly admitted that if the university stood to lose six million in state funding instead of just one million, the decision to raise tuition would likely have been different.

Instead of trying to control tuition directly with caps or incentives, policymakers could consider an alternative model for keeping tuition low -- linking tuition to aid policy. In this model, states require institutions to direct a percentage of tuition increases toward need-based aid. Kim and Ko’s research found that this model correlated to an average seven percent smaller tuition growth rate in states who had implemented it.

While Kim and Ko found statistically significant correlations between tuition setting authority, state control mechanisms and tuition hikes, an institution’s tuition growth was still largely correlated with levels of state investment (or disinvestment), changes in student enrollment, and the initial tuition levels at institutions. Institutions in states with high disinvestment, with large increases in enrollment and with high starting tuition generally saw tuition rise more than those who were in states with low disinvestment, stable or declining enrollment, and with lower tuition in 1997.

If lawmakers are still keen on adopting caps as a tuition setting philosophy instead of other mechanisms, however, they should be implemented carefully at levels that make sense. In our previous blog, we discuss a recent trend to determine what appropriate limits are by linking growth to macroeconomic factors.

In the wake of state disinvestment, legislators have faced pressure from universities calling for institutional autonomy, particularly around tuition. But while decentralizing tuition setting authority and offering generous caps could sound like reasonable concessions, research shows that these policies have been linked with a faster increase in college tuition."