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July 31, 2002 (25) Non-resident students help states financially, study shows ANN ARBOR---While the mission of public universities is to serve state residents, state governments benefit—primarily through future tax payments—when public universities increase their number of out-of-state students, according to a study that analyzed 27 colleges and universities in 16 states. "Surprisingly, we find that states gain more in expected future tax revenues when marginal out-of-state students are admitted to public universities than when marginal in-state students are admitted," said Jeffrey A. Groen, a University of Michigan doctoral student in economics. "This is because attending a public university in a particular state has a similar effect on marginal in-state versus marginal out-of-state students' probabilities of locating in the state after graduation. "And because marginal out-of-state students have higher future earnings—and future state tax payments—than marginal in-state students, this means that states lose rather than gain financially when public universities favor in-state applicants for admission." In the study, marginal in-state students are those with SAT scores that fall into the lowest 10 percent of the scores of all in-state students at the same university. Likewise, marginal out-of-state students are those with SAT scores in the bottom 10 percent among all non-resident students at the same university. Groen and economist Michelle J. White of the University of California-San Diego analyzed the college records and location decisions of nearly 70,000 students who entered one of 27 highly selective public and private colleges and universities across the country—including four flagship public universities—in either 1976 or 1989. The researchers say that because public universities usually set higher minimum admissions standards for out-of-state students than for in-state students—presumably following their states' preferences—marginal non-resident students usually have better qualifications and earn more money after graduating from college than their in-state counterparts. In fact, the study shows that lifetime state tax payments of marginal out-of-state students at public universities are 23 percent higher than lifetime state tax payments of marginal in-state students ($227,000 vs. $185,000, respectively), reflecting the higher income earned by the former. "These differences could be due to bias in location preferences, because students who choose to attend public universities in their home states are likely to pass up more lucrative occupations in order to remain home," White says. "In addition, they could reflect the lower minimum cut-off levels for in-state students at public universities, which imply that marginal in-state students have lower average ability than marginal out-of-state students." The researchers found that the adult location decisions of marginal in-state and out-of-state students are equally affected by attending a public university. Marginal in-state students who attend a public university in their state are 10 percent more likely to live in that state after graduation than state residents who go to college in another state. Similarly, marginal out-of-state students who enroll at a public university in a particular state are 10 percent more likely to relocate to that state than are non-resident students who attend college elsewhere. Groen and White also found that compared with marginal students, high-ability students are more influenced in their adult location decisions by where they attend college. "Together with the higher incomes of higher-ability students, this suggests that states always gain financially when more high-ability students attend college in the state," Groen said. "This also suggests a rationale for public support of at least one flagship public university that has high academic quality and is likely to attract high-ability students from both in state and out of state." In addition, while states gain more financially when in-state rather than out-of-state students of middle or high ability attend a university in the state, public universities often have a financial incentive to favor out-of-state over in-state students because non-resident students pay higher tuition, the researchers say. But when it comes to marginal or low-ability students, the study shows states that pressure public universities to set lower cut-off levels for in-state students than for out-of-state students are acting against their own financial interest. To see the study, look at www.econ.lsa.umich.edu/Placement/jgroen/in-state.pdf RELATED LINKS: Contact: Bernie DeGroat
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