By Jilian Mincer

NEW YORK (Reuters) - For generations, most college-bound Americans paid reasonable fees to attend publicly financed state universities.

But the bedrock of that system is fracturing as cash-strapped states slash funding to these schools just as attendance has soared. Places like Ohio State, Penn State and the University of Michigan now receive less than 7 percent of their budgets from state appropriations.

As a result, public universities -- which historically have graduated the majority of U.S. college students -- are eliminating programs, raising tuition and accepting more out-of-state students, who typically pay significantly higher rates.

The upshot of it all? Students face greater competition for admission, significantly higher tuition bills and bigger debt loads upon graduation.

"I'm concerned about the costs of these universities," said Mike Eskew, a former CEO of United Parcel Service, who in 1972 graduated from Indiana's Purdue University without loans. "Those institutions helped build this country. For people like me who grew up in small towns, they were the ladder to the world."

The state cutbacks also mean students are attending larger classes, frequently taught by part-time professors earning dismal salaries. In 2009, less than a quarter of all university faculty were full-time compared with 45 percent in 1975, according to the American Association of University Professors.

"The quality of education is a continuous worry and focus," said Peter McPherson, president of the Association of Public and Land-grant Universities and former president of Michigan State University. "As state support has been reduced, states have been looking more to universities even as they're cutting back." Despite the decreasing funding, he said, "You need to have these institutions feel as if they're part of the state."

STATES TIGHTEN THE SPIGOT

State and local spending for public university students dropped to a 25-year-low in 2011, the most recent inflation-adjusted numbers available. On average, states provided $6,290 per student enrolled at a public institution compared with $8,025 in 1986, according to the State Higher Education Executive Officers.

Some of the biggest cuts have come since the 2007-2009 U.S. recession as states have faced massive shortfalls. The cuts would have been deeper if states did not have access to federal dollars through President Obama's economic stimulus program.

"In tough economic times, some people think it is easier to cut funding to higher education because it has a tuition revenue stream that K-12 doesn't have," said Jim Palmer, a professor of higher education at Illinois State University. "At some point tuition will get too high."

The shift has been dramatic. Last year, Michigan provided the University of Michigan a mere 4.5 percent of its budget. The school's $7.8 billion endowment funded $266 million, almost as much as it received in state support.

Despite more than $235 million in spending cuts and cost-saving measures to non-academic areas since 2004 -- ranging from limiting the colors of Post-it notes to installing dual flush toilets to save water -- the University of Michigan is fortunate because it has a big endowment.

"We saw this coming," said Rick Fitzgerald, a university spokesman. "We made strategic cuts ahead so we weren't pushed into doing things we didn't want to do."

Other schools are not so lucky. New Hampshire cut funding for its university system by about half in 2011-12, and the University of New Hampshire now receives only 7 percent of its funding from the state compared with 32 percent 20 years ago.

As a result, the school followed a similar game plan taken by many schools. It froze hiring, laid off workers, hiked tuition and accepted more out-of-state students. The percent of out-of-state students is expected to climb in the new academic year to 56 percent, compared with 47 percent last year and 39 percent in 1991.

PAIN IS GREATEST FOR STUDENTS

But for all the pain felt at the universities as state funding shrinks, it is families that bear the brunt of the burden. Students face rising costs and have taken on more and more debt in pursuit of higher education.

Tuition and fees at public, four-year colleges have jumped by more than 70 percent on average over the last decade. Those costs hit $8,240 in 2011-12, up from $4,790 in 2001-02, according to The College Board. Between 2008 and 2010, alone, those costs climbed by 15 percent because of state budget cuts, according to the data released in June by the Department of Education.

Even with additional financial aid at many schools, students are graduating with even more debt -- an average of about $28,700, according to Mark Kantrowitz, publisher of FinAid.org.

Alicia Halberg, 22, was scraping by at the University of Washington in Seattle with help from her grandmother and a 24-hour-a-week job at a local candy story until tuition and fees soared almost 20 percent her senior year.

"Everything went up every year, and it made it pretty tough," said Halberg, who had to borrow about $8,000. But she says she's luckier than many of her friends, who'll be attending an extra year of college because crowded classes made it impossible for them to finish in four years. "It's really depressing because it shows our state isn't investing in our future," she said.

THE LURE OF FOREIGN STUDENTS

As schools grapple with the hard realities of less funding from their states, some are looking overseas for students willing to pay the much heftier out-of-state tuition rates.

The University of Missouri has struggled to adjust as its appropriation from the state fell to $165 million in 2012, down almost 15 percent from 2001 at the same time that its enrollment climbed by 45 percent to 33,805.

Tuition accounted for 60 percent of its operating funds in 2012, up from roughly 25 percent in 1990, one reason the University of Missouri has hired several recruiters in recent year, including someone to find prospective students from overseas.

"We are focusing on countries with a rising middle class and good schools," said Ann Korschgen, enrollment management vice provost at the university. That includes places like Brazil, Korea, China, India and Saudi Arabia.

It's just a sign of the times, say those who have remained in public education.

"It's really kind of sad because we're the land grant school," says Mary Jo Banken, a spokeswoman for the University of Missouri. "The state does not adequately fund us so we have to look for funding elsewhere."

(Editing by Walden Siew, Lauren Young, Leslie Adler)