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DOI: 10.1177/00027162135000352013 650: 168The ANNALS of the American Academy of Political and Social Science

Andrew Barr and Sarah E. TurnerGreat Recession on Higher Education

Expanding Enrollments and Contracting State Budgets: The Effect of the

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168 ANNALS,AAPSS, 650, November 2013

DOI: 10.1177/0002716213500035

ExpandingEnrollments

and ContractingState Budgets:The Effect of

the GreatRecession on

HigherEducation

By

ANDREW BARRandSARAH E. TURNER

500035ANN TheAnnalsof the American AcademyExpanding Enrollmentsand Contracting StateBudgetsresearch-article2013

The Great Recession heightened a growing conflict inthe United States between expanding enrollments inpostsecondary education and contracting public budgetsupport. Weak labor market conditions during the

Great Recession encouraged college enrollments, withmuch of the increase in enrollment occurring outsidethe most selective institutions. While federal aid poli-cies, including the Pell grant, became more generous,dramatic reductions in state budget allocations made itdifficult for colleges and universities to maintain pro-gramming and accommodate student demand. As aresult, the Great Recession has accelerated the cost-shifting from public subsidies to individual payments inhigher education.

Keywords: Great Recession; higher education

Even as demand for many goods and ser-vices tends to decline during a recession,demand for postsecondary education tends toincrease. Indeed, enrollment increases duringthe Great Recession have been particularlyevident.1 Total enrollment increased from

18.2 million to 21 million between fall 2007and fall 2010 (Snyder 2012, Table 198). Inturn, enrollment increases have occurredacross age groups: between 2007 and 2010 thepostsecondary enrollment rate increased from48.7 percent to 50.8 percent for those ages1819, 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 univer-sitys Center on Education Policy and WorkforceCompetitiveness. He is a recipient of both National

Academy of Education/Spencer Foundation and NSF/AERA dissertation fellowships.

Sarah E. Turner is University Professor of Economicsand Education at the University of Virginia and aresearch associate with the National Bureau ofEconomic Research. Her research focuses on both the

supply and demand sides of the higher education mar-ket, with particular attention to student aid policies and

college choice.

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EXPANDING ENROLLMENTS AND CONTRACTING STATE BUDGETS 169

those 2024, and from 6.7 percent to 8.5 percent for those in the 2530 agegroup.2

Yet even as enrollment demand has increased during the Great Recession, theoverall budget situation for public and nonprofit colleges and universities has

eroded dramatically. State appropriations declined markedly, while privateendowments lost substantial capital. For example, state appropriations to highereducation fell from $75.3 billion in 2007 to $73.8 billion in 2010. There is alsoconsiderable heterogeneity among colleges and universities in the United Statesin terms of sources of funds and how these resources have been affected by thefiscal crisis. For example, while well-endowed institutions faced a significant hitto assets and liquidity at the start of the Great Recession, such shocks haveproven to be relatively transitory (S. Turner 2013). In contrast, those institutionsreceiving substantial state appropriations have faced more extended cuts in fund-

ing while also facing significant limitations in the capacity to raise alternativerevenues 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 mar-gins. First, while only about 6.5 percent of postsecondary students were enrolledin for-profit institutions in fall 2007, nearly 30 percent (more than 730,000 stu-dents) of the increase in enrollment from that time to 2010 occurred at privatefor-profit institutions. Second, for public colleges and universities faced withdeclining state appropriations, increased tuition has served as one of the fewchannels for revenue generation. Tuition increases at public universities weremarked during the period of the Great Recession and such increases shift thecosts 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 ofincreases in the net price of college. Federal aid for higher education, largely inthe form of increased generosity of Pell grants and tuition tax credits, has serveda partial role of fiscal stabilizer. Indeed, increases in federal aid served tobuffer some of the effect of institutional tuition increases (though it is likelythat some of the tuition increases are endogenously related to federal aid).3

At most public institutions, the combination of declining state support forhigher education and increased enrollment demand generated declines inresources per student associated with the Great Recession. These changes havebeen particularly concentrated among community colleges and open-access four-year institutions, essentially widening stratification in higher education.

Our analysis begins with an overview of the enrollment response to the GreatRecession: we show the cyclicality in this downturn in the context of prior reces-sions and demonstrate the concentration of this response in particular sectors. Wealso compare the enrollment response of traditional-age individuals with older

individuals likely to have accumulated some labor market experience. In the sec-ond section, we present an overview of adjustments in federal policies, includingchanges in the generosity of the Pell grant program and tuition tax credits, whichimpact the net cost of college. The third section examines changes in institutionalrevenue sources, including state appropriations and tuition policies.

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170 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 dur-ing economic downturns. In periods of high unemployment or recession, theopportunity cost of time is lower. Yet increases in enrollment may be limited ifpotential students are credit constrained.4Combining this with declining publicsupport for colleges and universities leads to a theoretically ambiguous cyclicalenrollment response.

Figure 1 shows the overall trend in college enrollment in relation to the unem-ployment rate. The top panel illustrates the secular increase in college enroll-ment in recent decades while the bottom panel shows the change in enrollmentnet of the secular trend. Vertical lines indicate the formal periods of recession.Enrollment responds in both ratesdefined as the share of the 1840 populationparticipating in collegeand levels, represented by the number of studentsenrolled. While the magnitude of the employment effects in the Great Recessionhas been well documented, the rise in enrollment is noteworthy. Between 2007and 2010, total enrollment increased by nearly 2.76 million students, with about66 percent of these students enrolled full-time; during the more modest cyclicaldownturn between 2000 and 2002,5enrollment increased by about 1.3 millionstudents. (Regression evidence provides some indications that the enrollmentresponse to the Great Recession is greater than in prior cyclical downturns; we

discuss this finding [and its explanation] in more detail below.) Enrollmentamong women outnumbered male enrollment in this expansion, with the 20072010 increase for women at 1.539 million relative to 1.228 for men, though thisis consistent with the now well-known overrepresentation of women in collegeeducation. The increase in enrollment of black and Hispanic students has beenmarked, as well.6 The share of students enrolled as undergraduates remainedstable 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 andMcFarland 1995; Christian 2006; Barr and Turner 2013). There is far less evi-dence to draw on with respect to the question of how recessions affect collegechoice among inframarginal students. There is some evidence to suggest thatfiscal downturns may lead moderate-income students who are unlikely to be eli-gible for financial aid to shift from private colleges and universities to publiccolleges 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 thatthe unemployment rate has a large effect on high school graduation, a modesteffect on college enrollment, and no effecton collegedegree attainment (Kane



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1994; Card and Lemieux 2001). These analyses typically take advantage of

within-state variation over time in the unemployment rate, as well as other meas-ures such as state tuition and cohort size.7For these papers, the primary focus ison the economic conditions facing youths at the end of high school, or the typicalcollege-going ages.

FIGURE 1College Enrollment Rate by Year

NOTE: Fraction enrolled calculated as the (weighted) proportion of individuals 1840 yearsold enrolled during October of each year using the October Current Population Survey (CPS).Enrollment detrended using a linear trend.



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Yet those most likely to seek postsecondary training in response to cyclicalshocks are outside the set defined as traditional BA degree-seeking college stu-dents. While short-term labor market fluctuations are likely to leave unchangedwhether a young person pursues a BA degree (most degree-seeking students willbe inframarginal), recessionary conditions may have a substantial impact on thereturns to relatively short-duration enrollment and training opportunities, andmany students who choose to pursue such options are older than recent highschool graduates. Moreover, given the secular increase in the postsecondary par-ticipation of older students since the 1970s, the enrollment response of olderstudents is of substantial quantitative significance. While 74 percent of enrolledstudents were between the ages of 18 and 21 in 1970, recent data show that onlyabout 54 percent of undergraduate students are of traditional college age.8

To understand the overall distinctions in enrollment cyclicality by age, webegin by presenting the (detrended) series of enrollment rates by age. Figure 2Ashows enrollment for 18- to 19-year-oldsa group most likely composed ofrecent 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 likelyincludes many individuals with some labor market experience. In all three agegroups, the broad correlation between changes in unemployment rates andchanges in enrollment is evident for the last two decades, while this connection

FIGURE 2ACollege Enrollment by Year

NOTE: Fraction enrolled calculated as the (weighted) proportion of individuals 1819enrolled during October of each year using the October CPS. Enrollment detrended using alinear trend.



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FIGURE 2CCollege Enrollment by Year


FIGURE 2BCollege Enrollment by Year




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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 state-level unemployment rate. We compare the enrollment response during therecent period (20042011) with that observed over the last three decades9(Appendix Figure A1 provides a sense of the differences in unemployment ratechanges among states). Starting with the long horizon in Table 1, we find that theaggregate cyclical effect is quite weakoccasionally statistically different fromzero 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 mostrecent cyclical downturn suggests a very different dynamic: a 1-point increase inthe unemployment rate increases the probability that an individual is enrolled bya third of a percentage point.

Table 1 presents these results by age for the extended period from 1978 andthe decade leading up to and including the Great Recession. Unambiguously, thecoefficients are larger when we focus on more recent years.10While the magni-tudes of the coefficients are somewhat larger for younger students, the impliedrelative 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 percentincrease in enrollment for those ages 2024 and a 12 percent increase for thoseages 1819.

TABLE 1Unemployment Rate and College Enrollment

Sample Mean (DV) 19782011 19782011 20042011

Age 1819

UNEMP. RATE (UR) .43 .00186 .00110 .00939**

(.00185) (.00177) (.00389)

Age 2024

UNEMP. RATE (UR) .26 .000592 .00240** .00893**

(.00112) (.00105) (.00341)

Age 2530

UNEMP. RATE (UR) .06 .000206 .000845 .00254*

(.000510) (.000633) (.00128)

State Trends No Yes No

N 1,612,145 1,612,145 319,782

NOTE: All specifications include year and state fixed effects as well as indicator variables forgender, 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.



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older students and dislocated workers. Finally, declines in funding at public insti-tutions (primarily community colleges) may induce entry and expansion amongfor-profits. Cellini (2009) provides credible causal evidence to this point, showingthat the enrollment increase at community colleges (and relative decrease at for-

profits) is associated with increased funding from the passage of bond referendato support community colleges.

Federal Student Aid and Labor Market PoliciesThat Affect Enrollment

During the years immediately prior to and at the beginning of the GreatRecession, federal student aid became more generous (unlike cyclical downturnsin the 1980s and early 1990s). For this reason, federal funding served the role ofstabilizer in the face of substantial contractions in state appropriations andother sources of direct institutional support.

Federal aid and enrollment of low-income students

The Pell grant program is the foundational means-tested grant aid programfunded by the federal government to help low-income students finance under-graduate education. Since its inception as the Basic Educational Opportunity

Grant program in 1972, the Pell program has had explicit provisions for inde-pendent students as well as dependent students for whom need is determinedby parental circumstances.14While the maximum Pell grant increased moderatelyin 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 (2011dollars) between 20072008 and 20082009, but it also increased again between20082009 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 mid-1990s. As a point of note, the real value of the Pell grant has increased in the twomost recent cyclical downturns while economic downturns of the 1980s wereaccompanied by erosion in the real value of the Pell grant (see Figure 3).

Indeed, there is some evidence that the enrollment response in the GreatRecession has been somewhat greater than in prior cyclical downturns, whichmay 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 numberof Pell grant recipients has been marked, rising from 5.5 million in 20072008 to9.3 million in 20102011, before leveling off at 9.4 million in 20112012 (Trendsin Student Aid 2012). In turn, constant dollar expenditures on the programincreased from $15.9 billion in 20072008 to $37 billion in 20102011.

Cyclicality in the number of Pell grant recipients provides a perspective onhow enrollment among the most economically disadvantaged responds to local



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labor market shocks and the extent to which the Pell grant serves a stabilizingrole. As an empirical point, Pell grant receipt within a state is strongly counter-cyclical, and the magnitude of this effect appears to be somewhat larger duringthe Great Recession than in prior cyclical downturns. Regression of the log ofPell grant recipients on the state level unemployment rate net of year and statefixed effects shows the strong cyclicality in Pell receipt, with a 5-point increase inthe 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-incomestudents. First, economic downturns likely increase the number of Pell-eligiblestudents among inframarginal students, as students who would not have beenPell-eligible before the recession find that family or individual economic circum-stances push them into eligibility. In addition, institutional policies may haveshifted to increase Pell eligibility during the downturn (e.g., the increased use ofprofessional judgment for job losers). Using more detailed data from 20042010, relative to independent students we find a notably large response amongdependent students, with a 5-point increase in the unemployment rate leading toa 25 percent increase in the number of dependent Pell recipients. However, thisresult is likely driven by a stronger response to changing labor market conditionsamong low-income dependent students. Splitting our sample from the CPS byincome and examining the enrollment response of individuals 1819 years old(who are predominately tied to their parents household income) suggest that this

FIGURE 3Real Value of the Maximum Pell Grant by Year

NOTE: Maximum Pell amounts deflated using the Consumer Price Index.



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is indeed the case; individuals with household incomes less than $40,000 arenearly twice as responsive to changes in unemployment as their more affluentpeers. The increased generosity of the Pell program is likely one factor in therelatively large enrollment gains for low-income students.

Tuition tax credits

A substantial part of ARRA (which has been overlooked in the discussion ofthe extraordinary growth of the Pell program) is the introduction of the AmericanOpportunity Tax Credit (AOTC), which replaced the less generous Hope Creditthat dated from 1997.15The key features of the AOTC are that it is worth $2,500per year ($1,000 refundable), and it is available for up to four years, while theHope 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 expandedthe credit to higher- and lower-income taxpayers by expanding the phase outrange and adding a provision for refundability. The AOTC is available to manymoderate income tax payers, with phase outs between $80,000 and $90,000 ofmodified 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 theGreat Recession has been notable, rising from $7.2 billion in 2008 to $11 billionin 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 towhich the generosity of federal financial aid programs such as Pell, but also tui-tion 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 weexpect the increased demand for higher education to contribute to borrowing,but the near evaporation of private lending markets during the credit crisis likelygenerated substitution away from private sources of credit (including home

equity) toward student borrowing. We observe a dramatic fall in nonfederal bor-rowing combined with a substantial rise in federal borrowing. The largest com-ponent of the increase in federal borrowing is in the unsubsidized Stafford loanprogram, with the number of borrowers jumping markedly between 20072008and 20082009 from 3.8 million to 7.145 million and annual loan volumesincreasing from $38 billion to $51 billion, then leveling off at about $61 billionin 20102011. Between 20062007 and 20072008, the maximum that first-yearundergraduate students could borrow under the Stafford program increasedfrom $2,625 to $3,500 for dependent borrowers (both subsidized and unsubsi-

dized) and from $6,625 to $7,500 for first-year independent borrowers; in addi-tion, the cumulative undergraduate loan limit for unsubsidized undergraduateborrowing 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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However, it is important to remember that federal lending for higher educa-tion is not a complete measure of total lending for postsecondary education. Thegrowth in federal student loans may overstate the true increase in borrowing forstudents 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 parentsbefore the financial crisis.

Notably, private student loans have decreased as a percentage of total studentloans, from a high of nearly 26 percent during the 20062007 school year, duringthe student lending boom of 20052008, to 7 percent during the 20102011school year.18Although 14 percent of all undergraduates have taken out privatestudent loans, 46 percent of students at four-year for-profit universities havethem,19while the percentages for students attending four-year public universitiesand private nonprofit universities are only 5 percent and 18 percent, respec-

tively.20

In general, the percentage of private borrowers is highest for thoseattending for-profit and four-year institutions and lowest for those attendingpublic and two-year institutions. The percentage of private nonprofit school stu-dents falls in between for-profit and public.

A critical difference between federal and private loans is that private loans are notcapped. While maximum yearly loan amounts for Stafford loans range from $5,500to $12,500, depending on year of study and dependency status, banks issuing privateloans are not constrained by these amounts. Overborrowing, in the sense that thestudent borrows more than the Expected Family Contribution, occurs more oftenwhen private lenders issue their loans Direct to Customer (DTC) rather thanthrough an educational institution, which do not always certify the loan amountneeded through the college or university.21 The Consumer Financial ProtectionBureau identifies exaggerated estimates of cost of attendance as a major problem,with students having borrowed upwards of 175 percentof tuition costs with these

TABLE 2Unemployment Rate, and Log Appropriations and Log Tuition

Dependent Variable 19782010 20042010

LOG APPROPRIATIONS (per student) .0354*** .0382***

(.00268) (.00698)

LOG TUITION (PUBLIC 2-YEAR) .0228*** .0126**

(.00332) (.00606)

LOG TUITION (PUBLIC 4-YEAR) .0291*** .0234***

(.00250) (.00458)

State trends Yes 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 thestate-year level. Robust standard errors in parentheses.**Significant at the 5 percent level. ***Significant at the 1 percent level.



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loans during the 20052008 lending boom.22During this time, the credit quality ofstudents borrowing through DTC avenues was significantly worse than those issuedthrough schools; loans issued through DTC avenues typically go into default at a rate1.5 times that of loans issued through schools.23In the wake of the credit crisis, bet-

ter lending standards may produce fewer cases of extreme borrowing, but theseless 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 directcollege costs, Unemployment Insurance (UI) and other active labor market pro-grams, 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 con-siderable variation among states in the postsecondary programs in which anindividual can enroll while continuing to receive UI. In some states such asAlabama or South Carolina, only explicitly vocational programs meet eligibilitycriteria, while in other states such as Delaware or California, virtually any under-graduate program qualifies.

One policy concern surfacing early in 2009 was that many unemployed work-ers did not know of their eligibility for Pell grants and other financial aid tofinance training while unemployed. In May 2009, President Obama announced aprogram to encourage education and training for displaced workers. The federalDepartments of Education and Labor joined together to promote Pell grants forthe unemployed and changed state policies regarding simultaneous receipt offederal financial aid and UI benefits. In addition to promotion at the nationallevel through Opportunity.gov, states were encouraged to send letters to thosereceiving UI benefits to increase awareness of the program. Roughly forty stateshad sent or were in the process of sending these letters by the end of 2009(National Association of State Workforce Agencies 2010). Beyond variationacross states in the definition of qualifying training and Pell awareness, theexpected length of UI coverage likely impacts decisions to pursue postsecondary

training. With extended UI duration, an individual can plan a training investmentwith reduced concerns about credit constraints impeding his or her capacity tofinish the program.

When UI recipients are able to enroll in postsecondary education as part ofthe programs approved training provision, the duration of UI likely impactsenrollment decisions. During the Great Recession (and after), there have beensubstantial increases in the duration of UI benefits, which went substantiallybeyond the basic Extended Benefit provisions. As Rothstein (2011) describesin considerable detail, a relatively ad hoc set of congressional authorizations

eventually raised UI benefits as high as 99 weeks for displaced workers insome states. Barr and Turner (2013) find that the extension of UI by 10 weeksleads to an increase in enrollment of job losers by 2 percentage points, orroughly 20 percent.



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Funding for Higher Education Institutions during the

Great RecessionNontuition revenue streams in the Great Recession

While increased demand might be thought of as good news in most indus-tries, increased enrollment often implies a greater challenge in covering expensesfor colleges and universities. For public and nonprofit colleges and universities,tuition revenues cover only a portion of college and university operating expen-ditures. At public universities, subsidies from state appropriations account for asubstantial 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 sub-stantial share of operating expenditures with earnings from endowment.

The Great Recession dealt a dramatic blow to both sources of nontuition rev-enue. Overall, constant dollar state appropriations to higher education fell by 17percent from the 20072008 to 20112012, from $87.7 billion to $72.5 billion asshown in Figure 4. Because enrollment increased at public institutions, thisamounted to an even larger decline on a per student basis, with appropriationsper student falling from about $9,000 to $6,651 (constant 2012 dollars; Trends inCollege Pricing 2012). Notably, the declines in appropriations per student con-tinued well beyond the official end of the Great Recession, falling nearly 10percent from the 20102011 level of $7,321. One factor in this decline is the shiftin the distribution of student enrollment toward institutions such as communitycolleges with relatively low per-student subsidies.

FIGURE 4Public Educational Appropriations per FTE and Overall, 19802010

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1981 1986 1991 1996 2001 2006 2011

Millions,Constant2012$

Constant2012$

Appropriaons per FTE

Appropriaons (Millions), Right Axis

Not Including Federal Smulus Funds, Right Axis

SOURCE: Trends in Higher Education (2012); Grapevine reports, Illinois State University(19782011); Snyder (2012, Table 227).



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To be sure, there is a long history of cyclicality in the fluctuations in appropria-tions per full-time equivalent (FTE). Indeed, because nearly all states arerequired to balance their budgets, it is very difficult for states to smooth cyclicaldownturns in appropriations even as it may be desirable to fund higher education

countercyclically since credit constraints are likely to be exacerbated in economicdownturns. The combination of tightening labor markets, the collapse of housingmarkets, and overall reductions in wealth driven by the Great Recession resultedin shrinking state tax revenues as the bases for income, corporate, and sales taxfell. An increased reliance on income taxes, changes in the set of items subject tosales tax, and reduced diversity of the tax base resulted in higher volatility in taxrevenue during the last decade (see Campbell and Sances, this volume). As in allrecessions, 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, experiencedonly small changes in tax revenue, while essentially all other states faced sizablebudget gaps by fiscal year 2010.

Still, as tax revenues shrank, demand for many state services, includingMedicaid, continued to increase. Faced with budget shortfalls, states wereforced to cut spending or raise taxes. Nearly every state reduced real spendingbefore the Great Recession and beyond. After K-12 education and health care,higher education is the largest component of state spending. However, unlikethe other two, spending on higher education is relatively free of funding man-dates or matching requirements to receive federal dollars. This made highereducation funding an appealing target for spending cuts; between 2008 and2011, thirty-four states cut K-12 spending and thirty-one cut health care spend-ing, while forty-three cut spending for higher education, including stimulusfunds from the federal government (Johnson, Oliff, and Williams 2011). AsDelaney and Doyle (2007) and Kane, Orszag, and Gunter (2003) discuss, a dis-proportionate reduction in higher education spending is not a new strategy.Increases in entitlement (Medicaid) and nondiscretionary spending (pensionplans) over the last decade and the sentiment that universities can make up lostrevenue through higher tuition have made cuts to higher education a popular

response to budget gaps.25In Table 2, we examine the relationship between labor market contractions

and appropriations in a regression framework. Controlling for state and year fixedeffects, we find a strong relationship between changing state labor market condi-tions and appropriations; a 5-point increase in the unemployment rate results ina 20 percent reduction in appropriations for higher education, including stimulusfunds.26

Through the ARRA, the federal government attempted, and partially suc-ceeded, to smooth state funding for health care and education services, providing

nearly one-third of state general fund spending in 2009 and 2010. With themoney provided by the State Fiscal Stabilization Fund, effective cuts to highereducation were substantially lessened.27 However, by fiscal year 2011, federalsupport was reduced, resulting in additional reductions in funds available to stateinstitutions of higher education.



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In addition, as endowments shrank markedly, institutions that relied substan-tially on this source of nontuition revenue faced substantial shocks. The timing ofthe decline in endowment returns actually modestly preceded the decline in stateappropriations, suggesting that the impact of the fiscal crisis started somewhat

earlier for endowment-dependent private institutions than for public institutionsdependent on state appropriations. While 20072008 saw a local peak in appro-priations, endowment income started its slide in the same year, only to fall dra-matically in 20082009. Notably, the decline in endowment returns was notpermanent 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 stu-dent basis.

Appropriations from state sources, as well as from private endowments, allowcolleges and universities to provide institutional financial aid and across-the-

board subsidies. Over the course of the last several decades, there is evidencethat student subsidies have increased at the most selective institutions (particu-larly in the private sector) while declining somewhat in the public sector (seeHoxby 2009; Bound, Lovenheim, and Turner 2010). An implication of decliningstate appropriations is that colleges and universities must either increase tuitionor reduce the level of resources per student.

For public universities, these funding cuts are layered on top of state fundingmechanisms that were in disrepair prior to the recession (Kane, Orszag, andGunter 2003). Kane, Orszag, and Gunter (2003) identify crowding out fromMedicaid as one factor placing downward pressure on state higher educationfunding, while Rizzo (2004) identifies elementary and secondary education fund-ing as another source of fiscal pressure on higher education. The evidence is clearthat pressure to reduce state funding on higher education started well before thefinancial crisis (Bettinger and Williams, forthcoming).

Cyclicality of tuition

As postsecondary appropriations are cut in response to the recession, oneresponse 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 $6,860to $7,500) for public four-year institutions (Trends in College Pricing 2012). Theincreases have continued, albeit at a slightly slower pace but still well above therate of inflation, with increases of 6.7 percent and 4.6 percent in the two subse-quent years for public four-year institutions, and 5.5 percent and 4.5 percent forpublic two-year institutions (see Figure 5, which compares indexed tuitionchanges by type of institution). Notably, changes in the sticker price at publicinstitutions have been particularly marked at public flagship universities, which

are perceived to be the closest substitutes for private institutions and likely drawstudents with reasonably high capacity to pay.To illustrate, five flagship universities (University of California, Berkeley;

University of Florida; University of Georgia; University of Washington; andUniversity of Arizona) posted five-year in-state tuitionincreases of more than 60



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percent (constant 2012 dollars). Notably, these states are among those that weremost severely hit by the financial crisis. In Figure 6, we plot the percentagechange in resident tuition at flagship institutions against the change in the stateunemployment rate (20072011).28As expected, flagships in states hit harder bythe recession were more likely to enact substantial tuition increases, with a .54correlation between the change in the unemployment rate and the change intuition.

Indeed, this response is by no means unique to the Great Recession; Figure 7

illustrates the pro-cyclical nature of tuition for public postsecondary institutionsat the national level, while additional estimates from Table 2 confirm the relation-ship using state variation. A 5-point increase in the unemployment rate results ina 12 percent increase in tuition at four-year public colleges, almost double theincrease in tuition at two-year public colleges.

Tuition increases at private nonprofit institutions, which were largely unaf-fected by the erosion of state appropriations, were more modest over the sameperiod. While their enrollment weighted tuition charges did rise by about 6 per-cent between 20082009 and 20092010 (from $25,850 to $27,380 in constantdollars)which is the year in which private institutions were most likely to be

affected by endowment shocksincreases in subsequent years have been muchmore modest. Between 20092010 and 20102011, posted tuition increased byabout 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:

FIGURE 5Undergraduate Tuition by Type of Institution

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$0

$1,000

$2,000$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

1990 1995 2000 2005 2010

Constant2012$

Public Four Year (Le Axis)

Public Two-Year (Le Axis)

Private Non-Profit (RightAxis)

NOTE: Trends in College Pricing (2012, Table 8). In-state tuition is shown for public collegesand universities.



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FIGURE 7Net Price by Institution Type

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

-$2,000

-$1,500

-$1,000

-$500

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1990 1995 2000 2005 2010

Constant2012

$

Public Four Year (Le Axis)

Public Two-Year (Le Axis)

Private Non-Profit (Right Axis)

SOURCE: Trends in College Pricing (2012, Table 8).

FIGURE 6Resident 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.



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first, students are likely to be increasingly price-sensitive, potentially substitut-ing public institutions for private institutions; and second, because many privateinstitutions have substantial commitments to need-based aid or discount tuitionmarkedly, 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 tui-

tion rose dramatically, nearly 19 percent. With a high proportion of students eli-gible for federal need-based aid, there is good reason to believe that theseinstitutions raise tuition to maximize revenue, consistent with the Bennetthypothesis (Cellini and Goldin 2012).

Net price

While the sticker price or posted tuition generally receives the most publicattention, students and institutions should focus on different metrics. For stu-dents, the relevant price is the difference between posted price and financial aidor net price. Indeed, it is this net price measure that determines college afford-ability.29In turn, for colleges and universities that offer substantial financial aidfrom institutional resources, the change in tuition revenue is likely to be less thanany tuition increase. For public institutions, the need to make up for lost stateappropriations while also providing financial aid to maintain opportunities forlow-income students is a particular challenge.

Focusing first on the net price paid by students, which is tuition and fees lessgrant aid (from state, federal, and institutional sources), we see that theincreases are appreciably smaller than the changes in sticker price. Indeed, forstudents at public two-year institutions, the substantial increases in federalfinancial aid generate a sizable reduction in real net price, falling by $770between 2008 and 2012 (see Figure 7). Similarly, students at private nonprofitinstitutions averaged a modest decline in net price (about $60). It is only forstudents at public four-year institutions that average net price increased overthis interval (by about $570). Of course, one of the challenges in presentingdata on average net price is that with demonstrated increases in sticker price

and means-tested federal aid, it follows that some students (largely from afflu-ent families) will face very large increases in college costs, whiles students fromlower-income families may face larger reductions in net costs. Indeed, under-standing how net price changes across the income distribution is particularlyimportant, yet difficult. One open question is whether moderate income fami-lies may have been particularly squeezed in the Great Recession, as thisgroup is likely to have experienced not only declining real income but alsoerosion in housing wealth.

The sharp contractions of the Great Recession have accelerated the shift

toward tuition dependence among public colleges and universities. For publiccolleges and universities, particularly in the four-year sector, another revenuelever is the mix of in-state and out-of-state students. Since out-of-state stu-dents generally pay much higher tuition, often approaching prices charged by

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private institutions, increasing the number of out-of-state students is one fur-ther mechanism to affect revenue flows. Indeed, we calculate that between2007 and 2010, out-of-state enrollment increased by about 15 percent at stateflagship institutions and by about 20 percent at other public researchuniversities.30

Resources per student and subsidy per studentPublic institutions differ markedly in their capacity to make up lost state

appropriations with other sources of subsidy and tuition revenues. Table 3 showstotal instructional expenditures, net tuition revenues (total tuition charges lessinstitutional financial aid) and subsidy by type of institution for 20072008 and20092010.31While net tuition revenues increased by about 10 percent or $787at flagship universities, the increase was much more modest at community col-leges, rising only about $181 or 7 percent from academic year 20072008 toacademic year 20092010 (see Table 3). Educational expenditures per student

fell in real terms, on average, at community colleges from $8,549 to $7,674, asdeclines in the public subsidy per student outstripped the increase in net tuitionrevenues. In contrast, at flagship universities, real expenditures per studentremained relatively flat over this interval.

TABLE 3Expenditures and Revenues by Type of Institution (2010$)

Institution Type Academic Year Net Tuition Subsidy Education Expenditures

Public institutions

Flagship 0708 $8,533 9,687 18,220

0910 $9,320 8,912 18,231

Other research 0708 $7,451 7,774 15,224

0910 $8,305 6,858 15,163

Other four-year 0708 $5,717 6,292 12,010

0910 $6,332 5,485 11,817

Two-year 0708 $2,511 6,038 8,549

0910 $2,692 4,982 7,674

Private institutions Research 0708 $20,679 18,789 39,467

0910 $20,917 18,338 39,255

Other four-year 0708 $13,771 3,518 17,290

0910 $14,084 2,979 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, aver-age subsidy, and education and related expenditures per 12-month FTE student.

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Discussion: Implications in the Short Termand the Long Term

The Great Recession has produced unambiguous increases in college enroll-ment. It is, perhaps, too early to tell how this will translate to overall collegiateattainment, degrees conferred, and future labor market outcomes; but someevidence suggests it has translated into an increase in attainment in the shortterm.32While Card and Lemieux (2001) demonstrate the effect of weak labormarket conditions in prior economic downturns on young people havingtouched college, there is little evidence of their credit completion or degreeattainment. A related question is the degree to which this additional humancapital 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 officialend of the Great Recession, these will be ripe areas for additional research.

Not surprisingly, much of the increase in enrollment occurred in the sectorsof higher education that are likely to be most elastic in supplycommunity col-leges, open-access public four-year institutions, and for-profit institutions. Asemployment opportunities rebound, enrollment growth has leveled, and indeed,the Department of Education reports a modest decline in total enrollmentbetween fall 2010 and 2011 after the addition of more than 2.2 million studentsbetween 2007 and 2010.

While some of the enrollment changes brought about by the Great Recessionare likely to be transitory, the Great Recession has likely also brought permanentstructural changes in the financing of higher education. Even as the economy hasrecovered somewhat, state appropriations continue to slide, and few, if any, com-mentators 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 asrecent 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 willbe the case with our current fiscal decline.A long-standing debate in the economics of higher education concerns the ques-

tions 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 paysfor higher education. Among levels of government, we see a sharp erosion in statescommitment to funding public higher education, and there is little evidence thatthis trend will reverse. At the same time, the federal commitment to financial aidincreased markedly during the Great Recession, with the increases in Pell grantstargeted to low-income students and increases in tuition tax credits extending fur-

ther up the income distribution. Given looming budget battles, whether this fed-eral 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 increas-ingly clear that some families will be asked to pick up a greater share of the costs



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of college education. The rise in unsubsidized borrowing is one indication thatfamilies are not able to cover these increased college costs from their savings.Whether this change in pricing structure has produced a middle-incomesqueeze is an open question, requiring somewhat more data to assess in full.

With substantial differences among colleges and universities in their capacityto raise resources, the Great Recession has contributed to the widening in thedifferences in resources per student among institutions. As declines in appropria-tions are unlikely to be fully recovered through increased tuition at communitycolleges and public institutions outside of highly selective flagships, stratificationin resources, and outcomes, may increase.

Appendix

FIGURE A1Cyclicality and Enrollment for Selected States

NOTE: Enrollment residuals from a regression of college enrollment on age, gender, andrace 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 statefixed 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 duringthe Great Recession.



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Notes

1. The NBER dates the most recent recession as the 18-month period from December 2007 to June2009. 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 andafter 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 institu-tions (see, for example, N. Turner 2012; Long 2004).

4. For example, Lovenheim (2011) shows that, particularly for relatively low-income families, changesin housing wealth have a significant effect on enrollment.

5. Total enrollment actually fell slightly (by about 22,000 students) between 2010 and 2011. These dataare 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 those2530 (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 keyexplanatory variables, local labor market conditions have a substantial impact on the postcompulsoryenrollment decisions of girls and boys.

8. Data from U.S. Census Bureau, Current Population Survey. Table A-7: College Enrollment ofStudents 14 Years Old and Over, by Type of College, Attendance Status, Age, and Gender: October 1970to 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. Forexample, while the unemployment rate jumped from 6.5 percent to 10.1 percent between 2008 and 2009in Ohio, the change in North Dakota was a strikingly more modest adjustment of 1 percentage point, risingfrom 3.1 percent to 4.1 percent.

10. We have estimated our basic and state trends enrollment-unemployment specification for allnine-year periods between 1978 and 2011. The enrollment-unemployment relationship is strongerbetween 2003 and 2011 than every other nine-year period between 1978 and 2006. There are onlythree significant effects found across these twenty-one sets of estimates. In contrast, for the four mostrecent 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 theyare 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 respon-sive than other sectors to expanding enrollment demand in cyclical downturns. Following a substantialincrease 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 sub-

stantial effects on the enrollment of students older than recent high school graduates. Since the programsinception, eligibility for aid as an independent student has become more restricted, limited to studentsover 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, UnemploymentInsurance Reauthorization and Job Creation Act of 2010.

16. Changing eligibility and increased generosity of federal loan programs (in particular Stafford andPLUS loans) paralleled the changes in federal financial aid.

17. Student loan limits for borrowing from the Stafford program are set in nominal terms with limitstied 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 theloan limit or the cost of attendance less other aid and the expected family contribution. Cumulative subsi-dized Stafford borrowing increased from $17,250 in 19921993 to $23,000 in 19931994, which is the

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current maximum. All studentsincluding those eligible and ineligible for subsidized Stafford loansareeligible 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 PostsecondaryEducation 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 bydebt. While all the individuals referenced in the article had debt greater than $55,000, evidence from astudy 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 trendwhere increased Medicaid responsibilities have crowded out higher education spending. Combined withthe effect of the Great Recession, this has potentially important quality implications at public institutionsof higher education.

26. There is a similar relationship between the unemployment rate and overall tax revenues (resultsnot presented), suggesting the ARRA may have dampened the effect on appropriations somewhat whencompared to previous investigations of this link.

27. Reestimating Table 2 after excluding stimulus funds gives a sense of the magnitude of the stimulusstabilizing effect. These estimates suggest that stimulus funds reduced cuts to higher education by a littleover 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 familiesmay be unaware of the full availability of financial aid and note that such information deficits may impedeefficient college choice.

30. There is some evidence that suggests that public universities are actively increasing the number ofout-of-state students by loosening caps. This appears to be a trend that began before the start of the GreatRecession 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 hav-ing 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 therecurrent level of support will erode in real terms absent congressional action.

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