Crosscutting Issues

Higher Education

Is a Tidal Wave Coming?

Projections of Higher Education


There has been much talk of a "tidal wave" of new students in California's public colleges. Our own projections and our review of other projections indicates that this is not the case. The number of students will increase steadily over the next several years, but at rates which are less than what the state has experienced over the past 20 years. Even with this increase, the Legislature has many policy levers that it can use to manage enrollment and ensure that students receive the best possible service. In this section, we summarize the major findings from our recent report on projections of higher education enrollments at the community colleges, California State University (CSU), and University of California (UC). The full text of the report can also be found in our companion document The 1998-99 Budget: Perspectives and Issues(Part V).

The Enrollment Projections

Various reports have characterized anticipated increases in college enrollments as "Tidal Wave II." In its California Public Postsecondary Enrollment Projections: 1997 Series,the Department of Finance (DOF) projected that a total of 2,395,000 students (measured in terms of headcount, not full-time-equivalent [FTE] students) will attend the community colleges, CSU, and UC in 2005. This would be 484,000, or 25 percent, more students than enrolled in 1996. In its often cited 1995 report A Capacity for Growth, the California Postsecondary Education Commission (CPEC) projected that there will be 2,328,000 students in the three segments by 2005.

Projected Enrollment Growth Not of Tidal-Wave Proportions

If 1996-97 college-participation rates among Californians continue, we project that total enrollments in 2005 will be 2,142,000. This is approximately 253,000 fewer students than projected by the DOF and 186,000 fewer than projected by CPEC. Our projection is lower because we assume that current college-participation rates will continue, whereas the DOF and the CPEC assume that rates will increase by significant amounts, and in some cases to historic highs. We used 1996-97 participation rates because evidence suggests that using the most current rates as a base produces the most reliable projections. Even if the higher projections of DOF occur, however, future growth will be comparable to historic rates and not of tidal wave proportions. Figure 7 shows our projections of enrollment growth through 2010.

College Participation Is Up Among Young Adults.As Figure 8 shows, 23 percent of 18 to 24 year olds attended a public college or university in California in 1977. The participation rate of this group increased to 28 percent in 1996, the highest level in history. By contrast, the rate for those 25 years old and older fell from 5.4 to 4.2 percent over this same period. Because there are almost seven times as many adults 25 years old or older than there are in the 18 to 24 year old group, and because the percentage of older adults has increased significantly over the years, the overall participation rate for adults fell from 8.8 to 7.2 percent during this period.

The increase in participation rates among 18 to 24 year olds over the past two decades could at least in part explain why participation rates among older adults has fallen over time. As the state has been successful in educating people when they are young, there is less need to "catch" them when they are older.

Much Uncertainty in Projections of College Participation. Whether and where individuals attend college is subject to many social and economic variables. All projections of enrollment are based on assumptions about participation rates and, consequently, are subject to great uncertainty. Participation rates and enrollments in 2005 could be higher than we project, but they could also be lower. As a consequence, it is important that the Legislature consider a range of enrollment projections when planning for the operating and capital needs of the segments.

Effect on Operations Costs Probably Will Not Be Extraordinary. The costs of operating state colleges and universities generally are proportional to the number of students that they serve. To anticipate future operating costs, we compared 1996-97 enrollments to the projections described above for 2005-06.

If participation rates remain what they were in 1996-97, enrollments in each of the three segments would grow by a total of 12 percent by 2005-06, or 1.3 percent per year over this nine-year period. By contrast, total enrollment in the three segments increased by an average of 1.9 percent per year from 1970 to 1996. From this perspective, accommodating enrollment growth should not be any more of a challenge in the next nine years than it has been since 1970.

The DOF, which projects the highest rate of growth, projects that enrollments in 2005 will be 2,395,000. This represents average annual growth of 2.5 percent from 1996 to 2005. This rate of growth has been experienced during several periods over the past 20 years. For example, over the ten-year period from 1971 to 1981, enrollments grew by an average of 4.8 percent per year. From 1984 to 1991, enrollments grew by an average of 3.2 percent per year. Consequently, the budgetary challenges to come, even if the highest growth projections occur, are less significant than at times in the past.

Capital Needs for Growth Should Be Lower Than in Past. To understand how enrollment growth will affect demand for additional campus space, buildings, and equipment, we compared projected enrollments with prior peak enrollments. In 1991, total enrollment at the three segments was at its highest level in history. At that time, the segments were able to accommodate a total of 2,043,000 students.

Our projection of 2,142,000 students in the year 2005 is 98,000 students, or 4.8 percent, above the 1991 levels. This represents average annual growth of 0.3 percent from 1991 to 2005. Such growth would be significantly lower than the 2.7 percent annual growth in enrollments experienced by the three segments between 1970 and 1991.

As Figure 8 shows, the growth from 1991 to 2005 is lower in part because enrollments will not return to the previous peak enrollment of 1991 until sometime around the year 2000.

The DOF projects that total enrollment in 2005 will be 17 percent higher than enrollments in 1991. This annual growth rate of 1.1 percent is also well below the annual growth rate of 2.7 percent from 1970 to 1991. Even the highest projections, therefore, suggest enrollment will grow much more slowly than in the past. In terms of capacity requirements, then, none of the projections of future enrollment growth will be of tidal wave proportion.

Enrollment Growth Is Not an Unmanageable Force

Tidal waves are rare events of overwhelming and destructive force, and are inherently unmanageable. By contrast, the enrollment growth in higher education facing California is very manageable. Who goes to college and which college students attend is in part determined by public policies. The Legislature can manage growth, for example, through various policies as described below.

Eligibility Standards. The Master Plan for Higher Education calls for UC to select from the top 12.5 percent of high school graduates, for CSU to select from the top 33.3 percent, and for the community colleges to admit virtually all applicants. In 1996, UC selected from the top 20.5 percent of high school graduates, while CSU selected from the top 29.6 percent. (Please see our full report for a discussion of the way in which the eligibility pool for UC is measured.) While UC has consistently exceeded its Master Plan eligibility target, CSU has been either slightly above or below the target in recent years. To the extent UC lowered its eligibility pool to reflect the master plan, enrollments would shift from UC to CSU and independent colleges and universities with potentially significant General Fund savings for the state.

Student Fees. Student fees influence whether and where individuals will attend college. The recently enacted federal income tax credits for college tuition significantly reduce the fee differential between the universities and the community colleges. This could cause a large number of high school graduates who may have considered a community college for their freshman year to instead attend CSU or UC. This would work at cross purposes to state policies encouraging students to articulate through community colleges to the four-year universities. We analyze the opportunities and concerns that the federal tax credits raise for California in The 1998-99 Budget: Perspectives and Issues, (Part V) as well as in a separate LAO report.

Financial Aid. Financial aid policies also affect whether and where students go to college. Dollar for dollar, state expenditures on financial aid provide greater access to higher education than do across-the-board fee reductions. This is because financial aid targets students with the greatest financial need, who are the persons facing the greatest barriers to accessing higher education. State subsidies for higher education given through financial aid, rather than fee reductions, also shift some enrollment demand from the three public segments to independent colleges and universities in California.

Allocation and Articulation of Students Among the Three Segments. The Master Plan calls for large numbers of students to attend community colleges for their first two years of college, and for UC and CSU to give preference to qualified community college students seeking to transfer. The plan specifies that UC and CSU should not have more than 40 percent of its undergraduates at the freshman and sophomore level, and at least 60 percent at the upper-division level. In 1997-98, UC met this goal, and CSU exceeded it (with 70 percent of its students at the upper-division level). By increasing the opportunity of students to receive a lower-division education at community college that is comparable to what they can obtain at a four-year university, the state can increase the number of students served within the amount of General Fund resources available for higher education. This is because UC and CSU are more expensive than community colleges. The 1997-98 Budget Act, for example appropriated $7,000 from the General Fund for each additional FTE at UC, almost $5,000 for each additional FTE at CSU, and about $3,300 for each additional FTE at the community colleges.

Priorities for Community College Course Offerings. For the Legislature to manage enrollment growth in the community colleges, it needs to know how enrollments most likely would be allocated among college-level, remedial, vocational, avocational, and recreational courses. With such information, the Legislature could evaluate how well state funds were being allocated among the various missions of the colleges, and could influence the allocations through a variety of mechanisms.


Unlike a tidal wave, enrollment growth through 2005 will be steady and moderate by historical standards and manageable. While the Legislature will need to dedicate more resources to higher education, it also has several policy levers to manage that growth.


Federal Tax Credits

And State Financial Aid

We recommend that the Student Aid Commission, California Community Colleges, California State University, and University of California each report prior to budget hearings on the financial aid implications of new federal tax credits. These reports should include (a) adequate data for the Legislature to understand how each system's financial aid grants will interact with the federal credits, (b) estimated potential savings from maximizing receipt of federal credits, and (c) each system's specific plan for reallocating financial aid in order to maximize Californians' receipt of the credits.


New Federal Tax Credits for Higher Education. Last August, President Clinton signed into law the Taxpayer Relief Act of 1997. The act creates several higher education-related tax incentives, including the "Hope Scholarship" and "Lifetime Learning" tax credits. (Please see our discussion of the problems and opportunities created by the federal tax credits in our The 1998-99 Budget: Perspectives and Issues.)

These tax credits will dramatically reduce the after-tax cost of tuition and fees for many middle-income California students (or their parents). Figure 9 (see next page) summarizes key features of these credits. As the figure shows, the Hope Scholarship credit allows taxpayers to claim an annual credit of up to $1,500 per student for tuition and fee expenses for the first two years of college. The Lifetime Learning credit is a smaller percentage of costs, but it can be used by part-time students in any year of college, and by full-time students after the first two years of college.

State Financial Aid Emphasizes Grants. The state has a relatively elaborate system in place for the distribution of financial aid to higher education students. Some of this aid--administered by the Student Aid Commission (SAC)--is awarded to students to use at the California public or private institution of their choice. Other aid--administered by either the California Community Colleges (CCC), California State University (CSU), or University of California (UC)--may be used only at the institution awarding the aid. A large portion of the aid from the SAC and the public segments takes the form of grants. The budget proposes to spend approximately $800 million from the General Fund and other state funding sources for grants to students in 1998-99, as shown in Figure 10.
Figure 9
Key Features of the

Hope Scholarship and Lifetime

Learning Tax Credits

  Hope Scholarship Lifetime Learning
What years of college are covered? First two years only. Any year.
What students are eligible? Must be at least half-time. Part-time or full-time.
What costs are covered? Tuition and fees only.
What does the credit cover? 100% of first $1,000 in costs ($1,000).

50% of next $1,000 in costs ($500).

20% of up to $5,000 in costs (up to $10,000 in 2003).
What is the maximum credit amount? $1,500 per student. $1,000 per tax return.
Effective dates Academic terms beginning after December 31, 1997. Academic terms beginning after June 30, 1998.
Are there income limits? Credits begin to phase out at $80,000 adjusted gross income (AGI) and phase out completely at $100,000 for joint tax returns. For single returns, phase out begins at $40,000 and is complete at $50,000 AGI.
Will poor students benefit? Generally not. Poor students (and their parents) tend not to have the federal tax liability needed to receive the credits. The credits generally benefit middle-class students and parents.

Figure 10
Financial Aid Grants

From State Funds


(In Millions)

Student Aid Commission $310
California Community Colleges 130 a
California State University 120
University of California 240
Total $800
aIncludes $103 million of Board of Governors' fee waivers.

Grants Reduce Potential Federal Credits

The federal act requires that the amount of tuition and fees claimed by a taxpayer for purposes of receiving either the Hope Scholarship or Lifetime Learning credit be reduced by the amount of any grants received by the student (regardless of whether the grant covers tuition, fees, or any other college-related expense). As a result, grants generally will reduce the amount of federal credit that qualifying taxpayers otherwise would receive. In other words, state spending in these cases will lead to a dollar-for-dollar reduction in federal aid in California.

For example, any CSU student qualified for the Hope Scholarship credit who receives a grant fully covering annual fees of $1,506 would forfeit the full federal credit which he or she otherwise would receive--$1,253. From the state's perspective, this would constitute a major per-student loss of federal aid.

It appears the state has several ways to address this situation. For instance, the state (through SAC and the segments) could adjust the amount of state assistance that otherwise would be provided to students by the amount of any expected federal credit. This would hold students harmless, while freeing up state resources for other purposes (such as providing financial aid to more students). Alternatively, the state could avoid the loss of federal aid by changing the state's assistance from a grant to a loan guarantee. Either of these approaches would allow the federal aid ($1,253 in the above example) to reach the student.

At the time we prepared this Analysis, the higher education segments did not have plans in place to address the issues raised by tax credit/grant interactions, nor complete data revealing the extent to which these interactions may occur.


California's public higher education systems and the SAC have considerable discretion on the details of allocating financial aid to students. We expect that they will make financial aid shifts like the ones described above in order to take advantage of the new federal tax credits. These financial aid shifts imply major potential General Fund savings.

The Legislature should be involved in how these shifts are made and how any savings are reallocated--whether to increase financial aid for students who are too poor to receive the federal tax credits (due to lack of tax liability), to fund other higher education needs, or to address other state needs outside of higher education. Accordingly, we recommend that the SAC, CCC, CSU, and UC each report prior to budget hearings on the financial aid implications of the federal tax credits. These reports should include:

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