Association for Public Policy Analysis & Management

The rising price of college is seen as a major barrier to building the stock of college-educated labor. While most Federal and state policy efforts focus on reducing college costs, declining state funding of public institutions has also led to sharp cuts in per-student spending. When resources are scarce, how should public colleges balance tuition increases with spending cuts? In this paper, we study changes in price and spending in U.S. higher education markets from 1990 to the present using data from the Integrated Postsecondary Education Data System (IPEDS). Our empirical strategy exploits local variation in state budget shocks combined with state-level legislative tuition caps to jointly estimate the impact of changes in price and spending on student enrollment and degree completion. We find that enrollment and completion in nonselective public institutions is much more responsive to increases in spending than to revenue-neutral reductions in price. Applying our parameter estimates to a structural model of college choice, we estimate that a 100 percent reduction in the price of community college yields an enrollment gain that could be obtained at about 25 percent of the total cost of “free” college, if the funds were used instead to increase spending.