A rich interdisciplinary literature exists exploring the determinants of state higher education funding policies. However, that work has collectively ignored an important finding from political economy literature: namely, that citizens' preferences regarding public spending are strongly influenced by the state's ethnic and racial context. Drawing on a unique panel of state-level data covering the years 1982-2009, we find that states demarcated by increased racial and ethnic diversity and eroding white majorities do tend to spend less on subsidies to public higher education, resulting in decreased state appropriations as well as more tepid support for financial aid programs. Critically, however, we find that the negative effects of increased ethnic and racial fractionalization can be mitigated--and in some circumstances, fully offset--by a high degree of positive social interaction between ethnic and racial groups. These results are discussed within the pragmatic context of continued state emphasis on degree attainment as a mechanism to foster economic growth as well as broader considerations about equality and social justice.