The Effects of State Funding for Postsecondary Education on Long-Run Student Outcomes

Salem Policy Lunch

Michael Lovenheim, Professor of Economics, Cornell University

Most public colleges and universities rely heavily on state financial support for operation. As state budgets have tightened over the past several decades, appropriations for higher education have declined substantially, especially at less-selective institutions that tend to serve students with lower levels of collegiate preparation. Despite concerns expressed by policymakers and scholars that the declines in state support have reduced the return to education investment for public sector students, little evidence exists that can identify the causal effect of these funds on long-run student outcomes. We present the first such analysis in the literature using new data that leverages the merger of two rich datasets: consumer credit records from New York Fed’s Consumer Credit Panel (CCP) sourced from Equifax and administrative college enrollment and attainment data from the National Student Clearinghouse. We overcome identification concerns related to the endogeneity of state appropriation variation using an instrument that interacts the baseline share of total revenue that comes from state appropriations at each public institution with yearly variation in state-level appropriations per college-age resident. This “shift-share” instrument exploits the fact that a statewide change in appropriations for higher education will have larger effects on institutions that are more reliant on state funds. Our focus is on state appropriation shocks that occur when students are already enrolled in college, which allows us to abstract from extensive margin effects. We examine the effect of state appropriations among 25–30 and 30–35-year-old people, separately by whether students initially enrolled in a four-year or two-year institution. Our findings indicate that state appropriation shocks students experience in college have long-lasting impacts on their life outcomes into their mid-30s. Among students whose first college is a four-year institution, state appropriation increases during college lead to a lower probability of having any student loan debt, lower student debt balances, higher credit scores, and increased likelihood of owning a car and a home. For two-year students, state appropriations increase lead to higher credit scores, an increased likelihood of owning a car and a home, and higher auto and home mortgage loan balances. Our results underscore the importance of state support for higher education in driving the returns students experience to investing in college and highlight the role played by declining state appropriations in increasing inequality and stratification of outcomes in the postsecondary sector.