Walter W. McMahon, a professor emeritus of economics and of educational organization and leadership at the University of Illinois, is the author of "Higher Learning, Greater Good: The Private & Social Benefits of Higher Education." An expert on the economics of education, McMahon spoke with News Bureau business and law editor Phil Ciciora about higher education funding in Illinois.
Since 1996, state support for higher education in Illinois has been dramatically cut, leading to tuition increases averaging 50 percent at two-year colleges and 100 percent at four-year institutions, adjusted for 2015 dollars. Have we reached a tipping point? Are we pricing students out of the state?
Yes, we are pricing students out of the state. But it is much worse than that. Many good students from middle- and lower-middle-income families can no longer afford to attend college. And as Pell Grants and state Monetary Award Program grants fail to keep up, those families are priced out of higher education completely. Students from middle- and lower-middle-income families now represent a smaller percentage of total enrollments at public colleges and universities than before.
Is this continued underfunding sustainable?
Well, yes, but only in a death-spiral sense. Illinois' in-state tuition and fees at public institutions are now the fourth-highest in the nation, and Illinois' share of state support for its community colleges is 49th in the nation. So students are leaving for other states or just aren't going to college. And Illinois' growth and broader development are slowing in relation to other states - and will lag further as the economy recovers - because more states are reversing their underinvestment in higher education.
What does the underfunding of higher education portend for the state of Illinois? Do we need to start thinking of education funding as an investment in human capital rather than as a line-item expenditure?
Continued underfunding of higher education means fewer graduates, as students are priced out of earning a degree; slower state earnings growth, since there are fewer graduates with higher earnings; and slower development relative to other states, given higher education's measured contributions beyond earnings to other standard development indicators such as better health, child development, effectiveness of civic institutions and lower crime rates.
These adverse effects on the state's economy are in addition to the state budget, which already is stressed. With smaller earnings and fewer graduates gaining employability, state income and sales tax revenues will be lower, and state Medicaid, welfare and prison costs will be higher.
In sharp contrast to the investment in human capital through education, which has a measurable return over many years and ultimately finances most of the state budget, most other human services in the state budget support consumption. This is an absolutely vital distinction. The investment in human capital through spending on education yields returns in the form of increased earnings, employability and broader development outcomes over the next 45 to 65 years of each graduate's life.
Families are rightly concerned with the rising costs of college. What contributes to these ever-increasing tuition and fees - higher institutional costs or waning state support?
It is generally recognized that falling state support - both in Illinois and nationwide - is the primary cause of the sharp increase in tuition and fees. Since 1980, as state support per student in constant dollars fell 14 percent, tuition and fees rose. But in the last decade, total costs per degree in constant dollars at public universities - for doctoral, master's, bachelor's and associate degrees - have all been essentially flat, according to the College Board.
What has happened is that as the squeeze on costs has increased, class sizes have increased; the percentage of classes taught by teaching assistants, adjuncts and other non-tenured faculty have increased; and almost all student advising is done by less expensive and less highly educated staff. Average teaching loads for all faculty have risen. This has held the cost per degree and real expenditure per student almost flat, even though salaries have risen. Much of this has come at a cost to quality. It used to be that full-time tenured faculty taught all junior and senior undergraduate classes. But that is no more. So if state underfunding continues, not only will tuition continue to rise, there will be fewer faculty and the quality of teaching will continue to suffer.
What would be the effects from a cut in higher education funding roughly equal to the percentage loss in tax revenue due to the drop in state income tax rates?
I have estimated the effect of an 8.5 percent cut to education funding, which is the amount of tax revenue lost and the pro rata cuts in investment in education as the personal and corporate income tax rates in Illinois fall back to earlier levels.
My calculations show that there will be 9,181 fewer students enrolled in two-year colleges and 14,541 fewer in bachelor's degree programs.
In terms of the impact on the state budget, I estimate that over a five-year planning period, the loss of increased earnings by these 23,722 lost students will result in $200 million less sales and income tax revenue to the state. The increase in spending in the Illinois state budget that will be required is an even larger $950 million over 5 years. The latter increase is due to increased Medicaid eligibility and the loss of education's benefits to better health, more K-12 remedial costs, increased welfare payments, and increased costs in subsidies to prevent firms from leaving the state due to unavailable skills. Costs to the state also include increased prison and justice system costs, since college graduation reduces involvement in street crime; increased costs to state family service agencies resulting from larger families; and lower costs for elder care, since those without a college education die at younger ages.
But apart from the adverse effect on the state budget, most important is the effect on the state's economic growth and broader development that affects every citizen, but most especially struggling middle-class families. I recently re-estimated the return on each state dollar invested. It's currently 15.3 percent for two-year degrees and 14 percent for four-year degrees based on increments to earnings. It is twice that if the effects on health, child development, civic institutions, crime and other social benefits are included. Since the average cost of funds average about 7.2 percent over 10 years, higher education is a very good investment for the future of the state and its people.