State University Funding: Who Gets Money And How?

Public universities rely on state support for a large share of their operating revenues, which primarily serve their educational function. State funding for higher education is a significant share of state budgets. In 2021, state and local governments spent $311 billion on higher education, or 8.5% of state and local direct general spending. However, the amount of funding provided per student in public universities varies across states and has decreased over time. In 2008, U.S. states spent an average of $8,823 per college or university student, but this decreased by about $2,000 per student in the following year due to the Great Recession. The decline in state investment has shifted the cost of higher education to students and parents, contributing to the nation's student loan crisis and impacting students' ability to succeed academically and graduate into fulfilling careers.

State funding for public colleges and universities

State funding for higher education is crucial, as it helps keep the cost of attendance low for students. When state funding decreases, student tuition fees increase. Between 2008 and 2018, the two states that made the biggest cuts to higher-education funding were Arizona and Louisiana. Consequently, these two states also saw the biggest increases in tuition fees during those years.

The reduction in state funding for higher education has also worsened racial and class inequality, as rising tuition can deter low-income students and students of colour from attending college. To address this issue, lawmakers need to increase funding for public two- and four-year colleges, bolster need-based aid programs, and craft funding formulas that focus on building the capacity of colleges with the fewest resources.

Historically, states provided a far greater share of assistance to postsecondary institutions and students than the federal government. In 1990, state per-student funding was almost 140% more than that of the federal government. However, over the past two decades, and particularly since the Great Recession, state investments have declined, especially in general-purpose support for institutions, while federal investments have grown, largely driven by increases in the need-based Pell Grant financial aid program. As a result, the gap has narrowed, and in 2015, state funding per student was only 12% above federal levels.

Federal and state funding for higher education has different goals and channels. The federal government primarily provides financial assistance to individual students and funds specific research projects, while states mainly pay for the general operations of public institutions. Federal and state funding together still make up a substantial share of public college and university budgets, contributing 34% of public schools' total revenue in 2017.

Public colleges and universities educate 70% of the nation's postsecondary students. In 2017, 98% of state and 71% of federal higher education funding went to these institutions. The total amount and mix of revenue used for public higher education vary across states. Federal funding variation stems from differences in students' financial needs and the types of research conducted in each state, while the range in state funding is partly due to policy choices.

Student loans and borrowing

Student loans are a common way for students to pay for college, but it's important to understand the different types of loans and the implications of borrowing. The two main types of student loans are federal student loans and private student loans.

Federal Student Loans

Federal student loans are provided by the government through the Federal Direct Loan Program. There are three types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. Direct Subsidized Loans are based on financial need, while Direct Unsubsidized Loans are not. Direct PLUS Loans are credit-based, unsubsidized loans for parents and graduate/professional students. Federal student loans offer more flexible options than private loans, such as income-driven repayment plans and the ability to change repayment options even after taking out the loan. They also don't require a credit check (except for Direct PLUS Loans) or a cosigner. The application process for federal student loans involves filling out the Free Application for Federal Student Aid (FAFSA). The maximum amount that undergraduate students can borrow in federal direct subsidized and unsubsidized loans ranges from $5,500 to $12,500 per year, depending on their year in school and dependency status.

Private Student Loans

Private student loans are provided by banks and other financial institutions. They usually offer a choice between fixed or variable interest rates and have different repayment plans. Private student loans often require a cosigner and a credit check. The application process involves applying directly to the lender through their website. It's important to compare interest rates and repayment options before choosing a private student loan.

Borrowing Responsibly

When borrowing money for college, it's crucial to do so responsibly. Students should start with their college savings, scholarships, grants, and work-study options before considering federal and private student loans. It's also important to understand the long-term implications of student loans and to borrow only what is needed. Students should consider their future salary and potential loan repayment plans, such as income-driven repayment plans, to ensure they can manage their loan payments without sacrificing their quality of living.

Student tuition fees

The cost of tuition fees is a significant financial challenge for many families. The average college sticker price increased in the 2024-2025 academic year over the previous year across both public and private schools. The average sticker price for in-state public schools is about one-quarter of that charged by private colleges. The average in-state cost of tuition and fees to attend a ranked public college is nearly 75% less than the average sticker price at a private college, at $11,011 for the 2024-2025 year compared with $43,505 respectively.

Tuition fees are the amount advertised as the full rate for tuition and fees before financial need, scholarships, and other aid are factored in. The net price is the amount that a family pays after aid and scholarships are applied and offset the sticker price. For example, Harvard University in Massachusetts advertised a sticker price of $61,676 for tuition and fees in 2024-2025, but the average cost to students after receiving need-based grants that year was about $14,634.

In addition to tuition and fees, students must also pay other expenses, such as housing, food, and textbooks, which can run into thousands of dollars a year. Many families are unprepared to pay for college. According to a 2024 College Ave survey, fewer than half of parents with a child in college – 44% – felt ready to pay their child's first tuition bill.

Tuition fees have been increasing over time. Over the past decade, the average cost of tuition and fees has increased from $11,770 in 2011-12 to $14,307 in 2021-22. That's about a 20% increase over a decade.

The cost of tuition fees is also influenced by the level of state funding for higher education. A majority of state legislatures spent far less on public colleges and universities in 2020 than they did in 2008, which means colleges and universities must rely more on student tuition fees. Between 2008 and 2018, the two states that made the biggest cuts to higher-education funding were Arizona and Louisiana, and, not coincidentally, those were also the two states that saw the biggest tuition increases over those years.

How to Reduce Tuition Fees

There are a few ways to reduce the cost of tuition fees. Firstly, students can apply for financial aid and scholarships, which can help offset the cost of tuition. Additionally, students can attend public colleges or universities, which tend to be less expensive than private colleges. Students can also consider attending a college or university that offers need-based grants, which can significantly reduce the cost of tuition. For example, Princeton University, the No. 1 Best Value School among National Universities, provided need-based grants to 64% of undergraduates, with the average grant exceeding the school's tuition and fees for that year.

State investment in higher education

The impact of state funding on student debt outcomes and the long-run returns on postsecondary investments is significant. Increased state support leads to improved academic achievement, higher financial gains, and a greater likelihood of obtaining advanced degrees. For instance, a $1,000 increase in state appropriations per student at a two-year institution increases the likelihood of transferring to a four-year institution by 3.5 percentage points and obtaining a bachelor's degree by 4.6 percentage points. Additionally, state appropriations are passed on to students in the form of lower tuition, reducing the overall financial burden.

However, the decline in state investment has resulted in a reliance on tuition revenue to compensate for lost state revenues. This has led to a vicious cycle where students are forced to borrow more to pay for their education, driving up student debt. The pandemic has further exacerbated this issue, with higher education institutions losing an estimated $120 billion.

Despite the challenges, there is some optimism. In 2023, education appropriations increased by 3.7%, surpassing pre-recession per-student funding levels. Additionally, financial aid has been steadily increasing, and the student share of total education revenue has recently started to decline. Nevertheless, the impact of state funding declines and the shift to tuition revenue as the primary source of funding for public higher education cannot be overlooked.

To address these concerns, faculty and staff in state legislatures are advocating for the election of candidates who support public education and working to ensure that state lawmakers comprehend the needs of their students. Their efforts are crucial in shaping the state budgets for 2023 and beyond, with the goal of increasing investment in higher education to alleviate the financial burden on students and their families.

Federal government financial aid

In the US, federal money made up 14% of all college revenue in 2018, with 3.6% of total federal spending going towards higher education investments. The federal government directed 65% of its $149 billion investments to federal student aid, which includes scholarships, work-study programs, and loans.

The US government provides financial aid to students in the form of grants, work-study funds, and loans. Students can apply for federal student aid by filling out the Free Application for Federal Student Aid (FAFSA) form. The FAFSA form is used to determine eligibility for financial aid based on financial need and other factors such as citizenship, enrollment status, and academic progress. It is important to note that eligibility for federal student aid is not solely based on income, but also on a number of other factors.

In addition to federal student aid, there are other sources of financial aid available to students, including state financial aid, financial aid from schools, and private scholarships. Students can visit the StudentAid.gov website to learn more about the different types of aid and their eligibility.

The cost of higher education in the US has been increasing, and students are bearing the brunt of it. Between 2008 and 2018, tuition fees increased significantly in states that cut funding for higher education, such as Arizona and Louisiana. As a result, many students have had to take out loans to finance their education, contributing to the country's student debt crisis.

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