Part 2: Can We Afford Free College? Nailing Down Who Foots the Bill in an Economic Downturn

By Joelle Fredman, NASFAA Staff Reporter

Editor's Note: This is the second in a series of three articles examining the free college movement and how it could impact the nation's higher education system. This article focuses on the funding mechanisms for free college programs, how different programs are supported, and the financial implications of what presidential candidates are proposing. A subsequent article will delve into how free college programs affect financial aid offices. Look back at the first article from this series that focused on the current landscape of free college and what a federal free college program may entail.

Months before the novel coronavirus swept the globe and brought with it an uncertainty about the future of delivering and funding higher education, experts were already beginning to question whether the notion of free college could withstand the next economic downturn.

Now, the concept of free college may be put to the test.

Increased enrollments and tuition prices allowed colleges and universities to survive the Great Recession of 2008, despite massive cuts to states' higher education funding during that downturn. However, as Jessica Thompson of the Institute for College Access and Success (TICAS) explained, the economic crisis caused by COVID-19 has already resulted in much more drastic increases to unemployment rates. Students and their families very well may not be able to afford any further increases in tuition — jeopardizing future enrollments and depriving institutions of a key strategy they've used in the past to make up for lost revenue and remain open.

"There's no certainty on anything, anywhere … The nature of this crisis is so different," Thompson said. "It throws a lot of our current knowledge into a tailspin."

At the same time, Thompson said, the case for free college — or at least some form of a federal-state partnership to cover college tuition in this country — may be even stronger after the pandemic subsides.

"Traction on free college in the midst of this crisis as it lasts — that's not going to happen," Thompson said. "[But] going forward I do think there may actually be, as a result of this experience, a bit more of a clear case for the federal role in financing higher education, and what the benefits are."

While there hasn't yet been extensive research conducted on the funding mechanisms behind the many nascent free college programs at the state and local levels, some funding models thus far have proven to be more durable than others — and to better target aid to the neediest students.

First, Middle, Last: When Free College Kicks in & Why it Matters

Free tuition policies for the most part come in three funding models: First-dollar, middle-dollar, and last-dollar — the latter being the most common and least expensive:

  • The first-dollar model was more common when states and communities were first experimenting with free tuition, according to The Century Foundation (TCF). In this model, funds are disbursed to students before other aid is considered, which allows students to use other financial aid, such as Pell Grants, to cover non-tuition expenses like rent and food.
  • Students participating in a program with a last-dollar model, on the other hand, receive program funding to fill the gap in tuition costs after other financial aid is applied.
  • A middle-dollar approach — or as some groups dub it, a "first-dollar plus" model — is the rarest of the three and best exemplified by Oregon's College Promise program. In that state, funds are disbursed after other aid is applied to cover the cost of tuition, and students are given an additional $1,000 they can apply to other expenses such as food and rent on top of whatever program funds they receive. There are also a few states that have taken more unique funding approaches, such as Washington, where Promise program funds are disbursed after other aid without taking into account Pell Grants.

The funding model that states and local programs choose — or can afford — makes a difference in terms of which population of students their aid will target. 

A March 2019 report from the center-left-leaning think tank Third Way criticized last-dollar programs for subsidizing the education of the upper- and upper-middle-class student, "who is already more likely to go to college in the first place and be able to afford it." That's the case because those students will likely not have their expenses covered by aid and will qualify for more free-tuition program funds, while low-income students may not even dip into program funds because they will have more covered by other aid. For example, annual in-state tuition at the University of Florida is $6,380, and the students with greatest need already have almost 100% of their tuition covered by the maximum Pell Grant ($6,095 for the 2019-20 award year). 

"While the wealthier student's cost has been reduced by over $6,000, the low-income student has seen a meager reduction of $285. Meaning that while new funds have been allocated to make college more affordable, this program has not made college any more affordable for the low-income students who needs the help in the first place," the group wrote. 

Further, Third Way wrote that the low-income students would still be left with thousands of dollars in costs for textbooks, housing, food, and transportation. Instead of pushing for free college, the group instead urged lawmakers to triple funds for the Pell Grant program, and encourage states to invest more money in higher education.

Still, there are those such as former Under Secretary of Education Martha Kanter, who argue that the potential of free college to attract students who would not have otherwise pursued a degree outweighs the unintended consequence of funding the education of some students who may not need tuition help. 

Cost is the main reason more states and communities haven't adopted first-dollar models, according to Michelle Miller-Adams, a senior researcher at the UpJohn Institute, a nonpartisan, nonprofit research group. In fact, the Campaign for Free College Tuition (CFCT) estimates that the cost of offering free tuition to all in-state undergraduates is hefty —  ranging from about $43 million in Delaware to nearly $5 billion in California.

Public, Private, and a Mix of Both: Sources of Funding for Free College

It cannot be emphasized enough that every free college program follows its own set of rules — and that includes where programs derive their funding. For example, while some programs were born from philanthropic funds, others make use of public money. While some revenue streams depend on who is in office, others are derived from corporations.

State Programs

The majority of states' free college programs are funded by their state legislatures through the annual budgeting process, Miller-Adams explained. Consequently, she added, support for many state programs can ebb and flow as different parties take office. For example, Andrew Cuomo, the Democratic governor of New York, is highly supportive of free college, and his state-wide proposal, the Excelsior Scholarship Program, is most likely safe from budget cuts as long as he keeps his seat. Other states, like Michigan, have experienced more of a partisan tug of war. While Gov. Gretchen Whitmer, a Democrat, has proposed free tuition for community college students, the Republican-run legislature has no interest in funding it.

CFCT President Morley Winograd added that it can also be a challenge to get voters on board with raising taxes to support a program that lacks immediately measurable success metrics. It takes years to see changes in graduation and persistence rates for students whose tuition was waived, especially for programs at four-year institutions where the reported graduation rate tracks how many complete their degrees in six years, he said. 

On the other hand, Miller-Adams said, the positive outcomes that do materialize after several years go far beyond individual and economic benefit.

"Everyone knows that people who earn college degrees give back more, [and] state policymakers know this is a good idea," she said. "If you have a strategy, it's going to pay off, it's just not going to pay off for a while."

Economist and Harvard Professor David Demming argued something similar in a June policy brief in support of some form of free college.

"The short-run cost of expanding access to higher education is potentially large," he wrote, "yet the long-run cost is much smaller. This is because education is an investment that requires up-front spending, but pays back benefits over time."
There are also few funding mechanisms in place for state programs that aren't taxpayer-funded. The Tennessee Promise, for example, is funded by a $300 million endowment carved out from the state's surplus lottery funds, and Washington's program is set to be funded in fiscal year (FY) 2020 by the state's business and occupation tax, which is expected to raise $1 billion over four years. Due to the fact that the funding for these programs is not voted on annually or subject to political will, they are by nature more sustainable models, Miller-Adams said. However, these funding structures are few and far between. 

Community-Based and College-Initiated Programs

Funding for community-based free college programs are slightly more complicated. Generally, such programs are funded privately, either by philanthropists, foundations, or community businesses — or some combination of those sources. 

"It looks different everywhere," Miller-Adams said. "[Stakeholders] tap into whatever the local assets are to create funding for these programs." 

For example, the Pittsburgh Promise received $100 million to fund its program in 2007 from the city's largest employer, the University of Pittsburgh Medical Center, and the Arkansas-based El Dorado Promise is funded by the Murphy Oil Corporation, which calls the city home to one of its headquarters. The California-based Richmond Promise was originally funded by Chevron, which houses a refinery in the city, and Yale University funds the scholarship component of the New Haven Promise.  

College-initiated programs also vary in their funding, but are often supported by the college's foundations and philanthropic resources. The Ventura College Promise program in California, for example, is supported by a combination of funds from the California College Promise and private money raised in the county by the Ventura College Foundation. 

The True Costs of Free College: A Deep Dive Into the Numbers & Economy

How much do free college programs really cost to start and keep running? It largely depends on the structure and design of the individual program, as well as how many students the program serves. While funding for programs limited to a smaller number of students may range from $5.6 million to nearly $16 million, programs serving larger constituencies may come with much higher price tags. New York's Excelsior Scholarship, for example, is estimated to cost $87 million in its first year and $163 million by its third year. 

Just how financially sustainable the growing number of free college programs are, however, is still unclear — and only time will tell. Many programs are still in their infancy, and extensive data has yet to be collected on their funding mechanisms and financial strengths, experts say. 

In lieu of comprehensive data, Robyn Hiestand, the director of research and policy at the College Promise Campaign (CPC), asked 134 College Promise programs (61% last-dollar, 17% first-dollar, and 22% middle-dollar) in 2018 about the changes they have had to make to their programs after their original implementation.

Hiestand found that 39% of programs surveyed did not think there was enough funding to support free college, with the top reasons being a growing demand for free college (51%) and limited control over budgets (37%).

She also noted that almost half of the programs (45%) reported that they had financial sustainability concerns (the remaining programs were split between responding "maybe" and "no"), and that 37% of those programs made "budget adjustments" due to concerns over finances. Half of those programs instituted stricter eligibility criteria, 30% reduced their award amount, and others decreased administrative overhead (21%) and cut staff positions (13%). 

Despite the fact that the economic downturn that will result from COVID-19 is incomparable to the Great Recession and its effect on higher education, TICAS's Thompson said, notable disagreements exist between experts who have in the past pointed to the 2008 crisis as an indicator for the future for free college. 

Jen Mishory, a senior fellow at TCF, for example, said she was reassured by her research that showed a handful of states escaped cuts to their fee college programs during the Great Recession.

"States did maintain their Promise [programs], even at the time when states were not necessarily maintaining their overall education funding," she said. "These programs were relatively sustainable at a time when other programs were being cut."

Mishory said that what shielded free college programs from cuts is that policymakers "made much more clear commitments to their residents [than with overall education funding], and were willing to really make good on those commitments."

Winograd agreed that the nature of free college and Promise programs might be their saving grace — even after life returns to normal.

"The degree that a higher education program in a state has been characterized as a 'promise' to high school students [often means] states will be reluctant to renege that funding," he said. "We're hoping that will continue to be true."

Prior to COVID-19, Thompson told NASFAA she feared free college programs — even last-dollar programs that are relatively cheap to maintain — won't survive another blow to our economy. Plus, eerily, TICAS President James Kvaal warned in an October 2019 opinion piece for The New York Times that we might be closer to another recession than we think, citing a poll from The Wall Street Journal that found many economists believe it might happen before the end of 2021. 

Looking Forward: National Free College and Obstacles on the Horizon 

Prior to the virus, Thompson said, the "swing" in state funding for education due to changes in the economy is "a very suboptimal way to fund something like higher education," and that it does not bode well for free college programs. The best way to ensure free college is here to stay — and is offered as a first-dollar scholarship — is through a partnership between the federal government and the states, she said, such as almost all former Democratic presidential hopefuls proposed.

A strong partnership is ideal, Thompson said, because while states need to constantly balance their budgets and are quick to cut education funds during an economic downturn, the federal government can spend money countercyclically.

But it's going to be expensive, she warned. 

Sen. Elizabeth Warren's (D-Mass.) plan for free college at both four- and two-year institutions, for example, would have cost $1.17 billion over 10 years, which she proposed to pay for — along with an extensive debt cancellation policy — with an ultra-millionaire tax.

In presumptive Democratic presidential nominee Joe Biden's official plans to transform higher education, he proposed free college for two-year students. While Biden does not detail how much his free college program would cost, he wrote that his entire plan for "education beyond high school" would cost $750 billion over 10 years, and will be paid for by "making sure that the super-wealthy pay their fair share." Specifically, Biden wrote that he planned to cap itemized deductions by the wealthy at 28%.
But not everyone thinks national free college would be that costly. 

In an op-ed in The New York Times, Harvard's Demming estimated that it would cost the federal government $79 billion to fund free college, adding that while that number sounds high, in the context of what the government spent in 2016 on policies that helped defray the costs of college ($91 billion) it "could be more affordable than you think."

During that year, Demming wrote, $37 billion went toward tuition tax credits and tax benefits, $41 billion was used as financial aid for low-income students and veterans, and $13 billion helped to subsidize student loans. 

"If tuition payments were eliminated," Demming wrote, "students at public colleges would have less need for these programs."

Regardless of what different proposals might cost, Thompson said there is one key component missing from the conversation that is crucial to their financial sustainability — an agreement that the federal government will step up its funding when states meet times of financial stress. It's been a hard message to push on Capitol Hill, she said, because there is a mental barrier in awarding states more funds for what appears to be disinvestment in higher education.

"Some say state disinvestment has been a choice," she said. "But I don't think most states like to cut funding — it's more of a structural [issue]."

But COVID-19, she said, may change those minds, as it has revealed how crucial higher education is for our economy and strength as a country, as well as vulnerabilities in the way it is currently funded. 

"In an interesting way, the size, scope, and nature of this crisis almost puts the really increased federal role in higher education on the table in a way that during a typical recession, it wouldn't be," she said. 

Thompson said that, before the viral outbreak, lawmakers were on the cusp of designing the bones for some sort of bipartisan agreement on an increased federal role in funding higher education in the form of a bill to reauthorize the Higher Education Act. For the time being, however, "that's on indefinite hold."

"We've been advocating for recession protection — most [free college] proposals don't include recession protections," Thompson said. "That piece is becoming clearer than ever why it's important."

Continue to Part 3 of this Free College Series >>

Publication Date: 5/12/2020

James C | 5/12/2020 8:59:18 AM

There is a typo in this article: "During that year, Demming wrote, $37 million went toward tuition tax credits and tax benefits..." that should be Billion, not million.

For public colleges let's make the EFC mean something. If tuition and fees (not counting room and board, books and cost of living) is $15,000/yr and the EFC is 0 give that family $15,000 in free money. Start with the Pell and provide the rest through federal, state and yes some institution funding. If the EFC is $12,000 that family receives $3,000 in free funding etc... Colleges would be prohibited from raising tuition above the inflation rate. Private college students would continue to be Pell eligible. This could be paid for by ending the tuition tax credits and the loan subsidy. All loans would be unsubsidized.

David S | 5/11/2020 4:58:32 PM

An excellent and very thorough analysis of the free/so-called free/quasi-free college programs around the country. By now it's like going to a bar with a 10-page craft beer menu, there are so many programs in place and proposals for more that they're nearly impossible to keep track of. Obviously, we can discuss the pros and cons of each approach all day/week/month/year, and COVID has changed everything.

But to me, the overriding thing to consider is that we send the message out that higher education is a necessity, but we price it like a luxury. The affordability gap continues to grow, with no end in sight. If that isn't changed, we as a nation are facing some very serious consequences. To me, free public higher ed, along with federal and state aid continuing for private higher ed (because neither sector can accommodate the need by themselves) is the solution.

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