Chapter 24 US Higher Education Finance

We review basic facts about higher education finance in the United States and analytical, empirical and policy issues in that realm. Examining trends in higher education finance, we demonstrate growth in the share of revenues provided by government up to about 1980, with a steady decline thereafter. Student financial aid, a feature of growing importance, is awarded to students on the basis both of financial need and academic (and other) merit, with merit influencing not only total amounts of aid received but also the “quality” of aid packages, as indexed by the fraction of aid in the form of grants rather than loans or work. Although nearly two-thirds of American high school graduates now attend some form of post-secondary education, both whether and where they attend are importantly influenced by family background. Among students who score well on aptitude tests in high school, 95% of those from affluent family backgrounds attend college immediately following graduation, while only about 75% of those from low SES backgrounds do. High-income students are also more likely to attend private universities and colleges than are lower-income students, who are particularly likely to attend community colleges. Much more attention has been devoted to examining the demand for higher education than to explaining its supply. We review a number of topics on the supply side, including the state of evidence concerning the pricing and output levels of government financed and of nonprofit institutions as well as concerning the impact of government financial aid policies on institutional pricing and aid decisions. An important analytical and empirical challenge in studying higher education supply is the fact that institutional enrollment levels are regulated by selective admissions as well as by price.