A Better Bargain for Higher Ed
States and Congress should reverse their investment roles in higher education and Medicaid.
States are too strapped to spend on higher ed. Let's change that.
Forget about trying to corral Republicans and Democrats into fixing anything by fighting over the federal budget. Any attempt at a grand bargain in today’s toxic Congress would be dead on arrival. A better sort of bargain would be between Congress and the states over higher education and Medicaid – one that would sensibly rearrange government responsibilities while helping ordinary Americans.
The proposal is simple: The federal government would pay a higher share of Medicaid’s costs, and in return, states would return to the commitment of providing affordable public higher education.
The lack of state funding for higher education is worrisome. As a share of the economy, state and local spending on higher education is roughly where it was in the early 1970s. Meanwhile, household spending on higher education has since doubled, now making up the lion’s share.
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The Great Recession walloped state budgets, and many states refuse to raise needed revenues to adequately fund priorities. All but two are spending less per student than before the recession (adjusting for inflation), and eight states are still cutting funding for higher education. Budget cuts have been paired with sharp tuition hikes at public universities. The result is students saddled with ever more loan debt – hardly a sustainable model.
Public provision of education is important because it promotes opportunity and social mobility for individuals and because the private sector underprovides access to higher education (since student loans aren’t easily collateralized). Public higher education funding essentially comes in two streams – the states fund and run public universities, while the federal government contributes a smaller supplementary mix of grants (mostly Pell grants), tax breaks and student loan subsidies.
The federal government should help expand the state stream. With more public funding needed, directly subsidizing the provision of public education at the state level can be more efficient than subsidizing purchases of higher education via federal tax incentives or untargeted student loan subsidies. For instance, larger state budgets for their university systems would go to reducing the cost and/or improving the quality and supply of public universities and community colleges. (Conversely, less-targeted federal subsidies often end up as windfalls for costly for-profit colleges of dubious value.)
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Despite the need, states are too strapped to be spending more money on higher education. Renegotiating the budgetary responsibilities of states and Congress could change that.
States and Congress jointly provide many functions of government but often without the best coordination of their respective roles. And while state budgets and the federal budget are regularly reviewed and reformed, the division of responsibilities between the two levels receives no such comprehensive review.
To efficiently rejigger their roles, states should agree to provide more money for higher education in exchange for the federal government taking on a greater share of Medicaid financing. Rising Medicaid expenditures are consuming an increasing share of states’ revenue, which in turn crowds out other priorities, such as investment in higher education. The Great Recession greatly aggravated this dynamic.
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As a means-tested program, Medicaid eligibility and expenditures swell as incomes fall and poverty rises during recessions. During the Great Recession and its aftermath, the number of Americans enrolled in Medicaid soared by 12 million. Rising health care obligations during economic downturns – right as revenues are drying up – are much harder for state budgets to absorb than the federal budget. Most states are required by law to maintain a balanced budget, so these shocks during recessions prompt cutbacks to Medicaid benefits and provider payments, in addition to competing priorities and, notably, education spending.
The federal government, conversely, should be running larger deficits to help the economy during recessions and can borrow easily at relatively low interest rates.
Medicaid is a joint state-federal program, with each state administering its own program, but just over half of the funding coming from Congress. Increasing the federal share of Medicaid would be a breeze administratively, requiring only slight tweaks to the existing cost-sharing formula.
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A particularly appealing option would be automatically indexing Congress’ share of Medicaid to rise when the economy enters recessions or the poverty rate rises. Congress briefly increased their share of Medicaid financing during the Great Recession – a boon to the states that prevented even more drastic budget cuts – but this assistance ended prematurely.
By reducing the cost and volatility of states’ Medicaid obligations, Congress could pave the way for greater, more stable direct provision of public higher education, while also reducing its own less-targeted subsidies.
So unlike fights over the federal budget, a so-called grand bargain between states and Congress can be a win-win proposition, especially for America’s students.
