State Investment in Higher Education: Effects on Human Capital Formation, Student Debt, and Long-term Financial Outcomes of Students

Abstract

Most public colleges and universities rely heavily on state financial support. As state budgets have tightened in recent decades, appropriations for higher education have declined substantially. Despite concerns expressed by policymakers and scholars that the declines in state support have reduced the return to education investment for public sector students, little evidence exists that can identify the causal effect of these funds on long-run outcomes. We present the first such analysis in the literature using new data that leverages the merger of two rich datasets: consumer credit records from the New York Fed's Consumer Credit Panel (CCP), sourced from Equifax, and administrative college enrollment and attainment data from the National Student Clearinghouse. We overcome identification concerns related to the endogeneity of state appropriation variation using an instrument that interacts the baseline share of total revenue that comes from state appropriations at each public institution with yearly variation in state-level appropriations. Our analysis is conducted separately for two-year and four-year students, and we analyze individuals into their mid-30s. For four-year students, we find that state appropriation increases lead to substantially lower student debt originations. They also react to appropriation increases by shortening their time to degree, but we find little effect on other outcomes. In the two-year sector, state appropriation increases lead to more collegiate and post-collegiate educational attainment, more educational debt consistent with the increased educational attainment, but lower likelihood of delinquency and default. State support also leads to more car and home ownership with lower adverse debt outcomes, and these students experience substantial increases in their credit score and in the affluence of the neighborhood in which they live. Examining mechanisms, we find state appropriations are passed on to students in the form of lower tuition in the four-year sector with no institutional spending response. For community colleges, we find evidence of both price and quality mechanisms, the latter captured in higher educational resources in key spending categories. These results are consistent with the different pattern of effects we document in the four-year and two-year sectors. Our results underscore the importance of state support for higher education in driving student debt outcomes and the longrun returns to postsecondary investments that students experience.

Advocating for community colleges in the college completion agenda

“…Relying on the state legislature for any or all budget resources (Romano & Palmer, 2016) makes community colleges resource dependent (Pfeffer & Salancik, 1978, 2003) requiring engagement in the political process (Lorenzo, 2018). Community college resource dependence is exacerbated by potential competition with universities for limited state discretionary budget resources (Chakrabarti et al., 2020; Lorenzo, 2018).…”

“…Though community colleges appear to underperform in some completion metrics, strong evidence exists of the benefits of state investment. The National Bureau of Economic Research (NBER) reports state investment in 2‐year colleges led to increases in educational attainment, lower likelihood of student loan debt delinquency and default, more car and home ownership, and improved upward social mobility (Chakrabarti et al., 2020). The NBER stresses the importance of state appropriations for realizing state attainment increases (Chakrabarti et al., 2020, p. 35).…”

A Growing Divide: The Promise and Pitfalls of Higher Education for the Working Class

“…Schools can respond to such a budget shock in one of two ways: cut spending or raise revenue. Recent work has found that between 30 percent and 60 percent of a reduction in state appropriations is passed through to students in the form of higher tuition (Webber 2017; Chakrabarti, Gorton, and Lovenheim 2020). While higher tuition might be a more visible harm to students, Deming and Walters (2017) conclude that reductions in spending resulting from these budget shocks are actually more damaging to students as they lead to lower graduation rates.…”

Public Financing of Human Development in India: A Review

“…For example, financial support from the government to various education institutions helps in serving students from disadvantaged backgrounds and low-income households which can further help in reducing income inequalities. The state appropriation or spending by the government has positive short-run as well as long-run effects on students’ outcomes (Chakrabarti et al, 2020). Chakrabarti et al (2020) suggest that schools serving students from the lower-income groups are mostly affected by state expenditure cuts, which further lead to rising inequalities and poor student outcomes.…”

“…The state appropriation or spending by the government has positive short-run as well as long-run effects on students' outcomes (Chakrabarti et al, 2020). Chakrabarti et al (2020) suggest that schools serving students from the lower-income groups are mostly affected by state expenditure cuts, which further lead to rising inequalities and poor student outcomes. The study also finds that an increase in the state spending leads low-income background students to benefit more, have better credit scores in future with lower rates of debt defaults, and achieve better living condition in more affluent areas by the age of 35.…”