State Funding of Higher Education: Public vs. Private

In Europe, colleges and universities are largely public whereas in the United States there are numerous private, nonprofit, independent colleges and universities alongside the public institutions.  The U.S. mix and funding of public and private institutions is mainly at the state level, mostly at public institutions.  In 2006-2007, the states awarded more than $10 billion in state-funded financial aid.  In addition states provide appropriations for higher education operating budgets.   Forty-five states provide financial aid to private institutions or the students they serve.  Fifteen states provide direct grants for independent colleges and universities. Twenty one states have financial aid programs dedicated exclusively to students attending private institutions.  Many states provide financial aid programs which are available to students providing public or private institutions.  In 2009, private institutions received a total of 2.6 billion dollars.

The question raised in this study is whether it is more efficient to fund public institutions or to subcontract to and subsidize private colleges. The economic impact of public and private higher education institutions is important, as states face increasingly tight budgets, as the nation faces the demographic shifts which are predicted to lead to a skilled labor shortage, and as the level of international competition increases. 

State colleges and universities price discriminate through tuition for in- and out-of-state students.  Out-of-state students often face tuition thousands of dollars higher.  In addition, many states mandate that there be differential entrance criteria for in-state and out-of-state students.  The argument for the differences is that families of in-state students have paid taxes which in part are used support to public institutions and as such in-state students are subsidized through lower tuition.  This justification misses the differential local impact these students have through their spending.  In particular, all tuition, room and board, and incidental spending for out-of-state students is new spending for the state and will have a marginal impact on the local community.  For in-state students, incidental and board spending is new to the college community, but not to the state.  Thus, this spending should not be included in the impact analysis of public institutions on the state.

Differential tuitions at state institutions place private institutions at a disadvantage in competing for in-state students. However, private colleges will not be as disadvantaged with respect to out-of-state students.  Thus, it is expected that private schools will have a higher percentage of out-of-state students, increasing the (marginal) local impact of student spending.  We evaluate this difference in impact of the in-state and out-of-state student spending for both public and private colleges in Maryland using a state input-output model, IMPLAN.  The ultimate goal is to assess whether these differentials justify subsidizing private provision of higher education as an alternative to public provision.  Initial analysis indicates that adding a student at a public institution adds less than one third of the income generated by adding a student at a private institution.  A new student at a public institution is 6 times more expensive to the state than a new student at private institution.