Thursday, September 20, 2012

“Opportunity Costs” Series:

Financial Aid Cuts and Consequences
Christopher Stiffler
One of the most memorable topics discussed in Economics 101 is the idea of opportunity cost.  With a limited amount of resources, a decision to do one activity inevitably results the inability to do another.  Economists calculate opportunity cost by asking the question, “what is the value of the next best alternative that you give up in order to do that activity?” 

Pose the question, “what is the opportunity cost of attending this lecture?” to a bunch of freshmen Economics 101 students at 8 a.m. and the first response is always “sleeping.”

 Pose the question, “what is the opportunity cost of this new cut back in spending?” to a politician and it is difficult to get a straight answer.  This is because the indirect and foregone alternatives are very difficult to quantify.  But like all decisions, there is always an opportunity cost; always a relationship between scarcity and choice.  Cuts to state funding at one end inevitably result in trade-offs somewhere else. 

As Colorado has been cutting state funding to all sorts of programs, it has been difficult to quantify the indirect, downstream consequences.   The Colorado Center on Law and Policy’s goal with our “Opportunity Cost” series is to enumerate exactly what Colorado forgoes as it chooses to be a low-funding state. 

The first of this series investigates the state cuts to higher education.  Due to budget balancing and reduced General Fund revenues, Colorado higher education has seen a 30 percent operating cut since 2009.[1]  This means fewer dollars sent directly to Colorado institutions and fewer dollars available for Colorado students in the form of state financial aid.  To compensate for lower state funding, Colorado colleges and universities were granted the ability to raise tuition.  As a result, a new college tuition model began to emerge.  In the new model, wealthier students pay the higher tuition, which is then redistributed in the form of institutional aid to lower income students. 

Recent research about price sensitivity of Colorado college students shows that low-income students are much more sensitive to tuition increases than higher-income folk.[2]  In fact, among wealthier students, higher tuition correlates with higher enrollment while higher tuition correlates with lower enrollment in lower-income students.
Given that many low-income students will forego college without some form of financial aid, providing institutional financial aid to low-income students is paramount to replacing the state financial aid that has been cut over the past 5 years. 
The first graph shows average state aid per student and average institutional aid per student at 4-year institutions in Colorado.  State aid per pupil has fallen 40 percent since 2007 while institutional aid has risen at about the same pace.  This indicates that institutional aid has filled the gap left by declining state financial aid. 
However, this is not the whole story.  While 4-year universities have been able to increase tuition and provide additional institutional aid to low-income students, community colleges have not been as fortunate.  When we look at the same figures for 2-year institutions instead of 4-year, a completely different story emerges. 
For 2-year colleges, average state aid has declined 46 percent since 2007 while institutional aid has remained fairly constant. In the case of 2-year colleges, institutional aid has not filled the gap left by lower state aid. 

A more telling look at financial aid for low-income Coloradans comes when state and institutional aid is plotted as a percent of tuition. 
Aid at both 2 and 4 year colleges has fallen with aid at community colleges falling more than 4-year colleges.
This is just the tip of the iceberg.  In the first of CCLP’s “Opportunity Costs” Series we will investigate the overall consequences of higher education cuts across Colorado by addressing the following questions:
·         How sensitive are Colorado students to tuition prices?
·         How does the new model of financing higher education work out for different types of colleges?
·         What’s happened with overall student debt for Colorado students?
·         How has the recent recession impacted college attendance? 
While many of these questions have been addressed before, what makes our upcoming report especially unique is by answering:
·         How has this new higher education financing model influenced enrollment, broken down by sex, race, and income level?  

No comments: