Challenges Facing “Pay-What-You-Can-Afford” Tuitions at Public Universities

Abstract

Pay-What-You-Can-Afford (PWYCA) tuition structures are a suggested way to offset declines in state appropriations to public higher education, without limiting access for qualified low-income students. The concept implements high tuition, high aid tuitions routinely employed at private universities, effectively replacing private endowment income with state appropriations. The idea involves setting resident tuitions at non-resident rates minus the state appropriation per resident, and then using the subsequent incremental tuition revenue to subsidize low-income residents. This fairness-based approach in public higher education ignores: i) how non-resident tuitions are determined; ii) the welfare effects of introducing inefficient distortions in relative demand patterns; and iii) the likely accompanying decline in state appropriations. Here, the tuition-setting rules associated with PWYCA are derived, rather than being imposed, as solutions to a welfare-maximizing model in which non-residents pay fully-allocated costs and state appropriations are endogenous. University of Michigan budget, enrollment, and tuition data are used to illustrate the implications of selecting alternative high tuition, high aid tuition structures. Because demand-side inefficiencies are introduced, both welfare and, importantly, the state appropriation decline with implementation of PWYCA. While the decline in welfare is modest, the redistribution of value among residents, non-residents, and state taxpayers is substantial.