Guaranteed Tuition Plans Pose Greater Risk Than Potential Benefit

Amid what appears to be a national crisis of student debt, legislators and higher education leaders have clamored for a more affordable route to a bachelor’s degree.

Guaranteed tuition programs are among the innovations gaining traction. More than 300 colleges offer these programs, and a group of North Carolina legislators wants to explore whether to add the state’s 17 public universities to the growing list.

North Carolina House Bill 657, which was introduced last year, instructs the UNC System’s Board of Governors to “study the establishment of a fixed tuition program as a payment option at the UNC system schools,” asserting that “the citizens of North Carolina would benefit greatly….”

Tuition guarantee programs may seem like a good idea at first glance, but there are potential negative consequences for both students and universities. Under a guaranteed tuition plan, students are promised a constant rate of tuition for a limited time while they pursue their degrees. But the details of these plans vary widely, and some are more effective than others.  

The Illinois University System was one of the first public school systems to launch tuition guarantees in 2004. Under its program each public university is required to adopt a tuition plan that holds tuition constant for four academic years (or more for designated five-year programs) for first-time in-state students. Similarly, both Western Oregon University’s “Western Promise” program and the University of Kansas’s “tuition compact” offer a four-year flat rate, but extend a similar option to out-of-state students as well, at a higher rate.

By enrolling in guaranteed tuition programs, students and their families essentially take a gamble, which may or may not pay off. Students who choose a guaranteed program agree to pay a surcharge—often ranging from 5-15 percent over standard tuition—on the assumption that standard tuition will rise beyond that in the ensuing four years. However, if state legislators invest more in higher education, or if the student doesn’t earn a degree, guaranteed plans can cost students much more than standard tuition.

For a while Western Oregon University succeeded in setting rates in the Western Promise program, to save students in the long run. But beginning with the 2012 cohort (students who first entered the university in Fall of 2012), that no longer seems true, as students who chose the program ended up paying $1,266 more than those in the standard plan.

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Similarly, the University of Kansas failed to save students money in every cohort since 2009. Although students paid less on fixed plans in the last two years, it was not enough to offset the high rates they paid the first two, costing 2009 cohort students only $45, but 2012 cohort students paid $417 more.

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Universities also assert that by putting a four-year limit on tuition guarantees, students will be incentivized to complete their degrees during that period. However, despite a slight trend upward, four-year completion rates at Illinois public universities don’t appear to have been greatly affected by the introduction of tuition guarantees.

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Supporters of tuition guarantees also claim that year-to-year retention rates increase under these plans because students are able to accurately plan for costs. While first-to-second year retention rates remained much higher at the University of Kansas than the national average, the introduction of guaranteed tuition in 2008 doesn’t seem to have had a measurable impact. After an initial increase peaking in 2009, the Western Oregon University retention rates have declined steadily.

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While these plans may succeed in providing students and their families financial certainty from a tuition perspective, nearly all universities do not include room, board, and other fees in the fixed tuition rate, which means that students could still experience new unexpected costs each year.

Despite the claim to provide students the ability to be more financially prepared, the risks of these programs are not nearly as ambiguous as the benefits. Illinois’s current budget crisis illustrates the consequences of legislatively mandated tuition guarantees.

There has been no state aid for the public universities for more than eight months due to a state budget standoff between the legislature and the governor. Illinois’s 12 public universities have struggled to maintain operations while waiting out the crisis; however, because of the guaranteed tuition law, administrators are not legally allowed to raise rates on current students to cover short-term operational needs. The situation has caused Moody’s Investors Service to downgrade the credit rating of three of the state’s universities and pushed Chicago State University to accelerate the current semester and close its doors for the summer early.

At the very least, schools that freely choose to start tuition guarantee programs may also choose to end them in case of financial hardship. Some schools that turned to tuition savings programs because of the touted benefits realized that they are not always the most prudent option. The University System of Georgia discontinued its guaranteed tuition program in 2009 after just three years, citing decreased budget flexibility and necessitated budget reductions as factors in the decision. Similarly, Central Michigan University ended its program in 2008 because of diminished state funding.

Universities are consistently bad at predicting multiyear costs, and fixed tuition plans only further diminish budget flexibility. Since they lose the ability to spread sudden financial need to all students—for example, in the face of a budget crisis—the burden is placed entirely on incoming students. Furthermore students seem uninterested in the financial risk of guaranteed plans when given the choice, as evidenced by Texas’ lackluster rollout in the fall of 2014.

North Carolina legislators are right to be curious about the potential benefits of tuition guarantees. However, According to a 2014 report from the National Association of Student Financial Aid Administrators, there is no evidence that tuition guarantees actually affect retention or graduation. The report also cautions against attempting to use tuition guarantees to control the cost of attendance. Legislators and the public must be cautious about jumping on the bandwagon of a potentially damaging financial scheme in the name of affordability and student success.