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The rising costs of higher education are deeply troubling to families with modest or even middle-class incomes. As a result, many public research universities and states are investigating alternative tuition models. These models run the gamut from free tuition for all to a “pay what you can afford” model, which is already in use by some private universities and liberal arts colleges.

The “pay what you can afford” model might be best suited for institutions that attract large numbers of out-of-state students and whose students’ family incomes fall across a broad spectrum. In this model, tuition and fees would be set at the current out-of-state rate for both in-state and out-of-state students. The total state appropriation (per FTE undergraduate) would then be awarded to each in-state student, regardless of family income.

Modeled for the University of Michigan, where 40 percent of the undergraduate students are from out of state, this strategy would net about $90 million in new revenue annually for the institution, which would then be distributed to both in- and out-of-state students according to financial need. Depending on family income, students and their families could pay as little as $0 and up to as much as $53,500 (for out-of-state families with incomes over $160,000). This model has the potential to significantly improve financial access for both in-state and out-of-state students.

Hypothetically, tuition and fees for both in-state and out-of-state students would be set at the current out-of-state rate (for the University of Michigan, about $53,500 per year). An amount equal to the total state appropriation per FTE undergraduate (approximately $13,000 as of October 2015) would then be awarded to each in-state student, regardless of family income.

In this scenario, for in-state students with a family income of less than $40,000, in conjunction with work-study and the federal tax credit, the annual cost would be $0. For in-state students with family incomes between $40,000 and $120,000, the annual cost would be between $700 and $15,800. For in-state students with a family income exceeding $160,000 (and with no need) the cost to attend the University of Michigan would rise from the current $26,000 to about $40,000.

For out-of-state students with incomes less than $40,000, the annual cost would be $5,500. For those out-of-state students with a family income between $40,000 and $120,000, the annual cost would be about $6,200 to $21,300 (a decrease of 40–70 percent when compared to the current cost for these families).

With this strategy, an institution like the University of Michigan could meet the full needs of all in-state students (with no loans), provide additional aid to in-state families earning $120,000 to $160,000 per year, and meet the full needs of out-of-state students with families earning up to $120,000 per year.