1 2001 report the effects of tuition prices and financial aid on enrollment in higher education california and the nation By Donald E. Heller
2 the effects of tuition prices and financial aid on enrollment in higher education california and the nation Prepared for EdFund p.o. box Rancho Cordova ca Toll free By Donald E. Heller Center for the Study of Higher and Postsecondary Education University of Michigan 610 East University, 2117 seb Ann Arbor mi Contents copyright EdFund All rights reserved. EdFund and its associated graphic are trademarks of EdFund. All other trademarks are the property of their respective owners.
3 Table of Contents Letter... 3 Introduction... 5 Figures Figure Executive Summary Existing Research on Student Price Responsiveness... 7 Summary of the Existing Research... 8 Limitations of the Research Findings Updating the Findings of Leslie and Brinkman National Public Sector Enrollments California and College Access California Compared with the Nation Applying the Student Demand Literature to California Conclusions Figure Tables Table Table Table Table Table Table References End Notes... 32
4 August 2001 The California Student Aid Commission and EdFund are pleased to share with you this report, an assessment of tuition prices and financial aid, and how they affect students decision to attend college. Encouraging students to pursue and plan for a higher education is one of our primary goals. Studying the relationship between tuition, financial aid and enrollment is essential to our understanding of students needs in making the initial leap to higher education. This report provides a glimpse of the importance of financial considerations in the ability of students to pursue a college education. We appreciate your interest in this vital subject and hope that you ll find this report valuable in the ongoing consideration of these key issues for California s future. Sincerely, Wally Boeck Executive Director California Student Aid Commission Becky Stilling President EdFund
6 Introduction 6 The relationship between tuition prices and financial aid and how these two factors affect access to higher education has been debated at length by higher education researchers and policy makers over the years. This report, a component of the overall jbl Associates study of student financial aid effectiveness in California, attempts to accomplish the following: Provide a summary of the relevant research on the relationship between tuition prices, financial aid, and student enrollment and school selection decisions; Use recent study data to update historical findings on student price responsiveness nationally; Apply the national findings to California, taking into account unique characteristics of the state and its higher education system; and Draw some conclusions from these findings. A list of the data sources and other references is included at the end of the report, with sources also cited in the text. This report deals exclusively with undergraduate education.
7 Introduction 7 Existing Research on Student Price Responsiveness
8 Existing Research on Student Price Responsiveness 8 summary of the existing research A long and rich history of research studies have examined the relationship between college tuition prices, financial aid availability, and the decisions that potential students make about enrolling in college. This research is often referred to as student price responsiveness, student demand, or student price elasticity studies. Reviews of much of this research have been published over the last three decades by Heller (1997), Jackson and Weathersby (1975), and Leslie and Brinkman (1988). These studies have utilized a broad range of research methodologies, have used different samples of students, and have been conducted at different times. Given these differences, they reflect the fact that researchers and higher education policy makers alike generally accept a number of tenets. These include: Higher education is like most goods and services in our economy as its price rises, individuals are likely to consume less of it, all other things being equal. Higher education is what economists refer to as a normal good all other things being equal, as real incomes rise, more students will enroll in college. Tuition price changes and financial aid changes do not always have the same effects on students a $100 increase in price is likely to have a different impact on college enrollment behavior than is a $100 decrease in financial aid. However, studies have come to different conclusions as to whether students are more responsive to tuition prices or financial aid, depending upon such factors as the sample of students included in the study, the methodology chosen, and the time frame examined. Different types of financial aid have varying impacts on college enrollment behavior. In general, grants tend to have a stronger influence on college enrollment than do college loans or work-study (of the same face value amount). Students with varying characteristics have differing reactions to changes in tuition prices and financial aid offers. In general, African American, Hispanic, and low-income students tend to be more price responsive (i.e., are less likely to enroll in college, or change the type of institution in which they enroll, in the face of tuition increases) than are white and middle- and upper-income students. Enrollments in community colleges tend to be more price responsive than enrollments in four-year institutions, though much of this effect appears to be because of the disproportionate share of lower-income students who enroll in community colleges.
9 Existing Research on Student Price Responsiveness Tuition and financial aid policies in one college sector can influence enrollments in a different sector ( crosssector price elasticities ), though these effects are generally not as large as the reaction to same-sector price changes. Many subsequent studies of student demand have used the meta-analysis conducted by Leslie and Brinkman (1988) as a benchmark. Their analysis examined a number of individual studies to calculate what they called a student price response coefficient (sprc) for each. The sprc is defined as the change in the college participation rate of 18- to 24-year-olds for every $100 increase in tuition prices (in dollars). They concluded that: For the nation as a whole, a change in the 18- to 24- year-old enrollment rate per $100 price increase probably would be in the range of from.6 to.8 percentage points downward. Because this enrollment rate is.33, enrollments would probably decline from 1.8 percent to 2.4 percent for every $100 price increase (p. 132). They go on to note that: The studies also tell us that we probably should expect greater enrollment effects in community colleges and lesser effects in private colleges. As one goes up the cost, selectivity, and student/family income scales within these institution classifications, sprcs should decline (p. 132). For public institutions, Leslie and Brinkman concluded that sprc estimates of -0.7 or -0.8 appear sound when two-year schools are included, and values of perhaps -0.6 or -0.7 seem appropriate when they are excluded (p. 132). From these sprcs, one would expect an overall (public and private sector) enrollment drop of 1.8 percent to 2.4 percent, given that approximately one-third of all 18- to 24-year-old high school graduates were enrolled in college at the time they were writing. Leslie and Brinkman also examined the role of student financial aid in three decisions students make: 1) the decision whether to enroll in college or not (access); 2) what institution to attend (choice); and 3) whether to continue their enrollment from one year to the next (persistence). Their key conclusions were that financial aid, and in particular grants, had a positive effect on both access and persistence, and encouraged students to enroll in more expensive institutions. They also found that financial aid had the largest influence on the decisions of low-income students (largely because at the time the research they reviewed was conducted, most financial aid was targeted on lower-income students). 9
10 Existing Research on Student Price Responsiveness 10 limitations of the research findings A number of important caveats must be considered when reviewing these findings. First, the reader should remember that these effects are generally consistent when examining the behavior of large populations of students. They cannot be used to predict with certainty how a particular policy change may affect the behavior of any single student, or the aggregate behavior of a relatively small group of students, or even enrollment in a single state. Second, it is also important for policy makers and other observers to keep in mind that the research shows that college pricing and financial aid factors play a relatively small part of the decisions made by most students about enrolling in college. Other factors, when taken together, tend to play a much more important role in influencing college enrollment behavior. These factors include: the student s academic aptitude and achievement; course-taking patterns in high school and earlier grades; the role of parents, siblings, peers, and others in promoting college as a post-high school option; proximity of postsecondary education institutions; and economic conditions such as the state of the local economy and labor markets. Nevertheless, college pricing and financial aid policies are important levers in influencing collegegoing behavior for one critical reason: they are among the only factors that are under the direct control of postsecondary education policy makers in state governments, the federal government, and in public and private colleges and universities. Third, the implementation of federal tax credits and deductions for higher education-related expenses in the Taxpayer Relief Act of 1997 are too recent to have received scholarly scrutiny. We are just beginning to see data from the Internal Revenue Service, for example, on the income distribution of taxpayers who take advantage of these credits and deductions, but it is too early to tell what impact they will have on the decisions potential students make about attending college. A recent study by researchers at the University of California (Hoblitzell & Smith, 2000) examined the use of the tax credits by uc students and their parents; however, this study tells us little about whether the credits are effective in promoting college access or affordability, largely because it was restricted to a sample of students who were already enrolled in uc. Fourth, researchers do not know whether the effects of price changes on enrollment are symmetrical, i.e., whether the findings outlined above regarding the effects of price increases would be the same size in the opposite direction in the case of a price decrease. Until the last few years, when some states (including Arkansas, California, Massachusetts, and Virginia) have experimented by
11 Existing Research on Student Price Responsiveness cutting the tuition price at public institutions, the trend for decades had been one of price increases. Thus, the bulk of the research on student price responsiveness has examined the effect of price increases on enrollment, with little evidence of the effect of price reductions. While intuitively it may seem reasonable to expect a price cut to have an opposite, yet similar-sized, effect as a price increase, no empirical evidence exists to support this conclusion. Fifth, and perhaps most important, all other things are not equal. When economists and other researchers analyze the effects of a particular policy change, it is generally done with the assumption that all other factors are held constant or unchanged, or what economists refer to as ceteris paribus (Latin, other things being equal ). However, in real life, it is rare for the researcher to truly assure that all other things are truly equal, especially when examining changes over time. For example, it has been well documented that tuition prices in both public and private colleges experienced unprecedented increases during the 1980s and 1990s, increases that far outpaced the change in the ability of students and their families to pay for them (details of these increases are presented in the next section of this report). In addition, the 1980s and early 1990s were the baby bust era when many observers expected college enrollments to decline due to the shrinking pool of high school graduates. Yet even in the face of escalating prices and declining demographics, college enrollments continued to rise during this era. The reason? Most analysts point to changes in the labor market, and specifically, the increase in the college wage premium (the higher wages earned by college graduates relative to those without a college degree) over the last 20 years. Most youth understand that to earn a decent wage in today s global and information economy, a salary which in the past would have been associated with a middle-class family lifestyle, you now have to go to college. Thus, today s students are more willing to endure higher relative prices to go to college (and earn the requisite rewards in the labor markets) than were students a generation earlier. The lesson to remember from this caveat is that the predictions about how a particular policy change may impact college participation are made with the assumption of ceteris paribus. If other factors that affect college participation change simultaneously with the targeted policy change, the overall impact on college-going behavior may be quite different from what one would expect. 11
12 Existing Research on Student Price Responsiveness 12
13 Existing Research on Student Price Responsiveness 13 Updating the Findings of Leslie and Brinkman
14 Updating the Findings of Leslie and Brinkman 14 national public sector enrollments A recent study I conducted (Heller, 1999a) presents one picture of the relationship between college tuition prices, state financial aid spending, and enrollment in public institutions of higher education. The study examined this relationship across all 50 states for the period from 1976 to Utilizing data on enrollments, tuition prices, and state aid spending, I analyzed how price changes affected enrollments separately in both the four-year and community college sectors of public higher education, as well as in both sectors combined. The results of the analysis were used to compare to the earlier findings of Leslie and Brinkman. The $100 tuition increase Leslie and Brinkman used was converted to $160 in 1994 dollars (i.e., public college tuition prices increased on average 60 percent between 1982 and 1994). This study found that a $160 tuition increase was associated with an enrollment decrease of 0.5 percent in public four-year institutions, and a decrease of 2.3 percent in community colleges. 1 The results of this study can be updated to reflect current public college and university enrollment rates and prices nationally. Three adjustments have been made to update the results: 1) the tuition increases have been increased to reflect the increase in tuition prices from 1994 to 1999; 2) the tuition increase used as the basis for the sprc has been changed to reflect the same percentage increase in each sector (four-year and community college) sector; and 3) the college participation rates have also been increased to reflect the rise in participation since The study used tuition prices in the comprehensive university sector as the price signal for four-year public enrollments, and community college tuition prices as the signal for community college enrollments. 2 The $160 increase used as the basis of the sprc represented a 9.3 percent increase in comprehensive tuition, and a 16.2 percent increase in community college tuition. In order to model the same percentage increase in both sectors, these increases will be adjusted to reflect a 10 percent increase in each sector. In 1994 prices, this would be a $172 increase in comprehensive sector prices and $99 increase in community college tuition.
15 Updating the Findings of Leslie and Brinkman From 1994 to 1999, the average comprehensive tuition increased 26 percent, and community college tuition increased 21 percent (Washington State Higher Education Coordinating Board, 2000). Thus, inflating the 10 percent increase would bring the 1999 comprehensive sector increase to $217, and the community college increase to $120. The 18- to 24-year-old public college participation rate averaged 31.4 percent from 1976 to It is difficult to precisely measure the increase in the participation rate through the academic year because of the delay in the release of the Integrated Postsecondary Education Data System (ipeds) enrollment data from the National Center for Education Statistics. However, according to data from the Current Population Survey, the 18- to 24-year-old participation rate increased from 34.6 percent in 1994 to 36.5 percent in 1998, an increase of approximately 5 percent (National Center for Education Statistics, 2000, Table 189). Using this increase, the mean community college participation rate of 14.7 percent in the study can be increased to 15.4 percent, and the fouryear participation rate of 16.8 percent can be increased to 17.6 percent. 3 Table 1 presents the results of updating this study. The tuition increases noted above, updated for , equate to estimated enrollment decreases of 0.52 percent in four-year institutions and 1.34 percent in community colleges. Table 1 Calculation of Enrollment Effects for 10% Tuition Increase Tuition Participation Adjusted Enrollment Public Sector Increase Rate sprc Effect Four-year $ % % Comm. College $ % % Source: Heller (1999a) and notes in text. 15
16 Updating the Findings of Leslie and Brinkman 16 These enrollment effects are below the levels found by Leslie and Brinkman. Two primary reasons explain the differences. First, the college wage premium has increased in recent years. As described in my earlier study: During the two decades covered by this study, the wage premium earned by those who attended college compared to those who did not grew substantially. Clearly, even if nothing else had changed in the ensuing time period, students likely understood the increased importance of a college education in the labor markets. Thus, they are more likely to suffer tuition increases than their predecessors a generation or more earlier (p. 82). The second reason for the difference is that, as Leslie and Brinkman noted, their analysis paid special attention to studies of the price responsive of first-time college enrollees. As I said in my earlier study, One would expect upperclass students to be less price responsive because they already have invested in a portion of their postsecondary education and have fewer semesters of tuition left to pay to attain the benefits of a college diploma (p. 80). That study also examined the effects of changes in state need-based grant spending for undergraduate students. In order to compare the spending among the 50 states, which varied considerably, the grant budgets were divided by the number of 18- to 24-year-olds in each state. The spending per capita was then used as the predictor in the models. The study compared the relative enrollment effects of an increase in tuition and an increase in grant budgets by modeling a similar percentage increase in each. State grant spending per 18- to 24-year-old increased 14 percent from 1994 to Table 2 presents the results of updating the study for an increase in state grant spending to 1998 levels. Table 2 Calculation of Enrollment Effects for 10% Tuition Increase in Grant Spending Increase Participation Adjusted Enrollment Public Sector per Capita Rate sprc Effect Four-year $ % % Comm. College $ % % Source: Heller (1999a) and notes in text.
17 Updating the Findings of Leslie and Brinkman The effects of both the tuition and grant spending increases can be combined to estimate the impact on college enrollments. A $217 tuition increase (10 percent) in four-year institutions, in conjunction with a $6.15 increase in grant spending per 18- to 24-year-old (10 percent), would yield an estimated enrollment decrease of 0.2 percent. A $120 tuition increase (10 percent) in community colleges, in conjunction with the same increase in grant spending, would yield an estimated enrollment decrease of 1.2 percent. A relevant policy question to ask is, Given the sprcs in this study, how much would state grant spending have to increase to offset the enrollment effects of a 10 percent increase in tuition prices, i.e., keep enrollments at the same level? It is important to note that these effects are averages across students of all income levels. As indicated in Section ii, lower-income students are more price sensitive than middle- and upper-income students. Their enrollment numbers are likely to drop the most in response to tuition increases, and therefore are most in need of increased funding for student financial aid to offset the tuition increases. 17 To offset the tuition increase in the four-year sector, grant spending per capita would have to increase 15.9 percent. In the community college sector, grant spending would have to more than double, increasing 129 percent, to offset the tuition increase.
18 Updating the Findings of Leslie and Brinkman 18
19 Updating the Findings of Leslie and Brinkman 19 California and College Access
20 California and College Access 20 california compared with the nation A number of characteristics distinguish higher education in California from the rest of the nation. These differences need to be accounted for when examining the issue of the tuition and financial aid sensitivity of college enrollments. First, California has historically pursued a low tuition/low aid strategy of pricing public higher education as the means of promoting access to college, and that policy continues today. 5 While public sector tuition prices in California increased at a rapid rate in the first half of the 1990s, students in California today pay prices that are still significantly below the national average. Data from the Washington State Higher Education Coordinating Board (2000) can be used to examine these differences. 6 In the academic year, tuition and mandatory fee rates in the California State University system averaged 55 percent of the national median. 7 In the California Community Colleges, the average was only 22 percent of the national median. At the University of California, students pay 77 percent of the price paid by students in comparable institutions in other states. 8 The ability of students and their families to pay for college is a function of two factors: 1) their income, and 2) the cost of college. College affordability in California is enhanced not just because of its status as a low tuition state, but also because household income in California is above the national average. These two factors together indicate that the cost of college, at least as measured by the sticker price, is much more affordable in California than in most other states. Using data from the Census Bureau (2000b), I calculated the cost of tuition and fees in each of the three sectors of public higher education in California and nationally as a percentage of median household income. The results are shown in Table 3. In every sector, college is much more affordable (relative to families ability to pay) in California than in the nation as a whole. Table 3 Tuition and Fees as a Percentage of Median Household Income, 1999 Public Sector California US Comm. College 0.8% 3.9% Comprehensive Universities (csu) Research/Doctoral Universities (uc) Source: Author s calculations from California Postsecondary Education Commission (2000a), United States Bureau of the Census (2000b), and Washington State Higher Education Coordinating Board (1999).
21 California and College Access Second, California s population, especially among the traditional college-age group (18- to 24-year-olds), is more racially and ethnically diverse than the rest of America. Figure 1 shows the racial/ethnic distribution of the 18- to 24-year-old cohort in California and in the nation as a whole in African Americans, Hispanics, and Native Americans the groups that historically have been underrepresented in American higher education make up 49 percent of the traditional college-age population in California, as contrasted to 30 percent nationally. As described in Section ii, the college enrollment of these groups tends to be more price sensitive than white and Asian-American students. California is one of only five states (including the District of Columbia) where whites now are a minority of the 18- to 24-age cohort, and only in Hawaii and New Mexico are whites a smaller percentage than California. Thus, the overall enrollment effects of tuition or financial aid increases in California may be greater than one would expect from the existing literature that has utilized national population samples. Figure 1: Racial Distribution of 18- to 24-year-old Age Cohort in California and the Nation, 1999 Native American Asian American African American Hispanic White 0.9% Source: United States Bureau of the Census (2000d). US California % Percentage of 18 to 24 Population
22 California and College Access 22 Third, while the nation as a whole is projected to become more diverse in the future, California is expected to outpace the country by this measure also. Figure 2 shows the projected growth in the number of public high school graduates by race and ethnicity in both California and the nation. Asian Americans, who have had high college participation rates in both California and nationally, and Hispanics and Native Americans, who have had low rates, are projected to be the fastest growing groups in California. A recent report by the (California Postsecondary Education Commission, 2000b) forecast that from 1998 to 2010, the number of students prepared to enroll in one of the three public sectors of higher education in the state will increase by 36 percent, or over 700,000 students. A bit less than three-fourths of this growth will be due to population growth, while a little more than one quarter will be the result of higher college participation rates. Figure 2: Projected Growth of Public High School Graduates in California and the Nation, Native American Asian American African American Hispanic White TOTAL Source: Western Interstate Commission on Higher Education, US California %
23 California and College Access The fourth factor is the differences in higher education participation rates, and how they are structured, in California and the nation. Data from an earlier study i conducted (Heller, 1999b) can be used to examine these differences. In 1996 (the most recent year for which data were available), the ratio of undergraduate enrollments to the population in California was approximately 0.54, i.e., for every 100 residents of the state between the ages of 18 and 24, there were 54 undergraduates enrolled in college in the state. The same measure for the country as a whole was The importance of this attribute to the issue at hand in this study is that California is likely closer to the theoretical maximum college participation rate than the nation as a whole, and thus, may have less room for growth in enrollments. While there has been little research on the subject, one can presume that higher education participation rates are subject to a ceiling effect, i.e., they are not likely to reach 100 percent simply because there will always be some individuals who will choose not to enroll in college, even if the price were zero. 9 California also stands out when you examine the distribution of enrollments between the community college and four-year sectors. 10 In 1996, two-thirds of all undergraduates in California were enrolled in community colleges; nationally, only 43 percent were enrolled in this sector (National Center for Education Statistics, 2000, Table 202). The broad participation in community colleges is the reason for California s outpacing the nation in college participation rates. While nationally the community college participation rate of 18- to 24-year-olds was approximately 21 percent in 1996, in California it was 36 percent. As described in Section ii, community college enrollments have been found to be more tuition and financial aid sensitive than the four-year sector, though at least part of this difference can be accounted for by the fact that lower-income students (who themselves are more price sensitive) are disproportionately enrolled in community colleges. 23
24 California and College Access 24 applying the student demand literature to california As described above, higher education in California differs from the nation across a number of characteristics. Thus, some adjustments to the findings of the student demand literature (most of which, as described earlier, has used national samples of students) must be made to apply what we have learned to California. A rand study (Shires, 1996) estimated the price responsiveness of prospective students in each of the three public sectors in California. Rather than measuring price responsiveness using the student price response coefficients of Leslie and Brinkman, Shire instead expressed it in terms of the price elasticity of demand: E D = % change in quantity % change in price For example, if the price of college was increased 1 percent, and enrollment dropped 1 percent, the price elasticity of demand (E d ) would be The greater is the absolute value of E d, the more responsive to price changes is the demand for the good. Shires found the following price elasticities for the three public sectors in California, based on pricing and enrollment data from the years to : California Community Colleges California State University University of California Thus, at the community colleges, a 10 percent increase in price was projected to result in a 1.5 percent decrease in enrollments. Consistent with the findings described in Section ii, Shires found that community college enrollments were more price sensitive than were those at the University of California system. However, he found that enrollments in the California State University were the most price sensitive of the three sectors. Shires study can be used as a baseline for examining how students in California may respond to price changes, and how this may change in the future.