OFFSETS IN STATE APPROPRIATIONS CHALLENGE “PAY-WHAT-YOU-CAN-AFFORD” TUITION POLICIES AT PUBLIC UNIVERSITIES
OFFSETS IN STATE APPROPRIATIONS CHALLENGE “PAY-WHAT-YOU-CAN-AFFORD” TUITION POLICIES AT PUBLIC UNIVERSITIES

Summary/Abstract: Pay-What-You-Can-Afford (PWYCA) tuitions are a suggested way to offset declines in state appropriations to public higher education, while increasing access for low-income students. The idea is to set resident tuitions at non-resident rates, minus the state appropriation per resident, and then to use incremental tuition revenue to subsidize low-income residents. The concept mimics high tuition-high aid price discrimination approaches employed at private universities, effectively replacing private endowment income with state appropriations. PWYCA, as typically presented, ignores: i) how non-resident tuitions are determined; ii) the welfare effects of introducing distortions in relative demand patterns; and iii) the endogeneity of the state appropriations. Here, the tuition-setting rules associated with PWYCA are derived as optimal solutions to a welfare-maximizing model in which non-residents pay at least fully-allocated costs and the state appropriation is endogenous. Because demand-side inefficiencies are introduced, student welfare and the state appropriation both decline. Most importantly, because of endogenous declines in non-resident tuition revenue and the appropriation, there is no added revenue to allocate to low-income residents. University of Michigan data are used to illustrate quantitative implications of selecting high tuition-high aid structures. While the decline in welfare in this example is a modest 5%, the redistributions of value among residents, non-residents, and state taxpayers are substantial.

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