State Subsidy Reallocations and Postsecondary Institution Spending: Driving a Divergence in Education Quality and Amenities

State governments in the U.S. lower the cost of higher education by allocating funds to different types of subsidies. The prevailing trend over the last two decades shows declining appropriations that subsidize institutional operations and rising grant aid that subsidizes attendance for certain students based on income or academic achievement, which may fundamentally shift the demand for institutional spending between educational quality and amenities. While the effects of state subsidies on enrollment patterns and tuition are well-established, their impact on institutional expenditures remains underexplored. This study models the allocation of state funding between direct appropriations and financial aid based on need or merit, and examines institutional spending across core operations, such as instruction and student services. An analysis of four years of public institutions between 2004 and 2022 finds that the mix of subsidies relates to divergent within-institutional spending between functions associated with educational quality and the quality of amenities that may or may not align with the goals of subsidies. Furthermore, these divergences are observed across institutions according to their level of undergraduate admissions selectivity. As other public services constrain the level of state funding available for higher education, this study sheds light on the potential consequences of policies that alter the allocations of available funds across appropriations and grant types.