Commentaries
Michigan's Experiment with Incentives to Keep Down Tuition Hikes

By James M. Hohman

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February 19, 2016

Politicians around the nation like to say that they have held down tuition at their state universities. Michigan’s are no different, and to validate their claim, in 2011 they added incentive-based funding to university appropriations.

Here’s how it works: The state sets aside an amount of money (1.5 percent of our state’s higher education budget, which comes to somewhat over $19 million) that will be distributed to state colleges and universities, provided that they don’t increase tuition rates by more than 3.2 percent annually, subject to annual budget negotiations.

University officials get to choose. If they think they’re better off by keeping tuition increases down and taking the incentive funding, they can do that. But if they think they’re better off by raising tuition as much as they think the market will bear, they can do that instead.

(It’s worth mentioning here that under Michigan law, the state universities have a great deal of freedom to make their own decisions and therefore we have a more competitive environment than is the case in states like North Carolina, where the legislature plays a major role in tuition levels.)

Let’s see how this experiment has worked. Since the incentive began, only three universities failed to receive the funding: Wayne State University in fiscal year 2014 (8.9 percent tuition increase), and Eastern Michigan University and Oakland University in fiscal year 2016 (7.9 percent and 8.5 percent respectively).

Eastern Michigan University gave up $1 million in incentive funding, but its tuition hikes are expected to raise $10 million, according to the Associated Press. Oakland University expects $13.2 million from a tuition increase and only gave up $1.2 million from the incentive, according to The Oakland Press. Wayne State’s tuition increase was expected to bring in $7 million, but the university would lose out of $500,000 in incentive funding, according to Michigan Radio.

These tuition hikes may have been a disincentive for students to attend. Wayne State’s full-year equivalent students fell 2.8 percent, a larger decrease than the state average loss of 0.5 percent. But the loss of students at Wayne State is likely part of a long-term trend, and unlikely due to a cost-conscious student population. Wayne State attendance is down 10.1 percent over the past five years.

When universities fail to qualify for incentive-based funding, the money they would have received is distributed to the universities that did qualify. This accounted for a small $23,800 boost at Lake Superior State University, but an extra half-million for Michigan State University and the University of Michigan in Ann Arbor.

Legislators are finding that their tuition allowances are too large to force universities to contain tuition increases. Michigan’s university administrators face the same environment as those in other states. With a few exceptions, they have been able to raise tuition and still get more students to pay the higher prices. (See the graph below for total tuition revenues.)

And while the state added a tuition incentive, Michigan has a long-term trend of reducing support of higher education. These are replaced in-kind with higher tuition and fees. Based on the data, incentive-based funding for restraining tuition increases does not appear to have impacted this phenomenon in any way.

State University Revenue

Perhaps the incentive helped to keep tuition lower than it otherwise would have been. But until students start to demand lower tuition or abstain from higher education altogether, the tuition incentive will do little to change the overall trends of universities raising their costs.

Michigan’s attempt to control tuition through incentives failed because the financial rewards were too small and the regulations too lenient. An effective incentive-based funding scheme can be neither too permissive nor too restrictive—it must live in the sweet spot along this spectrum. For instance, if universities are allowed to easily qualify for the funding, it will not change their behavior in a meaningful way. But, on the other hand, if it is too difficult to qualify, universities might give up chasing the incentive-based funds and not change their behavior.

The tuition restraint experiment is worth the attempt. If it gets to the point where the students start to economize on their higher education costs, incentives can encourage positive movement towards lower tuition rates—and eventually towards university cost-cutting. Until then, it at least puts the state on the record—backed by real money—that it disapproves of the seemingly perpetual trend of universities raising the price of admittance.

 


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