summarizes

Finance in Higher Education ­ AFFORDABILITY OF HIGHER EDUCATION ­

Lesson 1 Objectives ­

By the end of this lesson, students should be able to:

• List and define the three broad issues facing higher education finance • List and discuss the three reasons a tenured faculty member can be dismissed • Describe the complex nature of how higher education is financed • Identify the four primary groups responsible for paying for college. • Support their opinions about whether higher education is a business enterprise • Explain the main factors that have contributed to the increases in tuition costs

Lesson 1 Introduction ­

The cost of obtaining a college degree has increased significantly over the past 50 years at a rate that is well above personal household income. These costs have come under increasing scrutiny from external sources including the general public and government agencies. Colleges are spending more time and money as they are held more accountable for these increases in cost.

During the same period costs have risen the number of students who can afford an education has decreased. Fewer students have access to higher education which fuels the debate on who should be allowed to obtain a degree. One of the major challenges facing higher education is affordability and access.

The business of higher education is similar to corporations in many respects. Higher education has raw materials and investment, revenues and expenses. On the surface it seems that we could easily compare a college to a business. However, colleges have many different outputs so it is confusing when we try to reduce our work to simple units of measure. We engage in teaching, learning, research and service.

Colleges are also different from a “for profit” company in that we are not trying to maximize profits. In theory, we are trying to provide the best quality educational experience while maintaining a break-even operation. A further complication of higher education economics is that we take in money from government and donors. Our prices are influenced by fluctuations in annual costs and the rise and fall of external revenue sources.

Surveys of higher education seek to assemble common definitions and measurements with which to compare colleges. One survey is the Integrated Postsecondary Education Data Systems (IPEDS). IPEDS is the most useful survey currently being used by the U.S. Department of Education. You should be familiar with the major areas of revenues and expenses used by IPEDS reporting.

Although there are differences between public and private revenue and expenses there are some major recent trends facing higher education. Tax subsidies from the government are declining. Net tuition revenue is declining. Private gifts and grants are in decline. Endowment income fluctuates with market conditions. Tuition costs are increasing at a rate above the average household income. The availability of loans for students has risen sharply over the

Affordability of Higher Education Page 2 of 5

past two decades. More of the cost of college has been passed on to the consumer during the most recent period. Fewer students can afford a college education.

No one would go into the business of higher education today if they considered how the costs of education are distributed. One notable exception are the for profit schools that have come on the scene over the past 30 years. It makes no financial sense to start a business where less than 45% of the product is paid for by the customer. This means that at least 55% of the cost of higher education is paid by federal, state, and private sources. For profit colleges rely mainly on loans that are made available to students for their return on investment.

The pressures of paying for college are intense and are becoming more complex every year. The federal and state government has pushed the cost of higher education to student and parent loans over the past decade. This fact will eventually lead to financial crises in the U.S. when students are unable to repay these loans.

We must do a better job understanding how to better manage our universities if we are going to continue to offer the quality educational product we enjoy today. Public pressure and these pending crises will bring this upon us if we do not address it ourselves.

The three broad issues facing higher education finance are: quality, access, and efficiency. Each of these themes run together and affects each other both directly and indirectly. If we focus on quality we generally sacrifice how many students can attend and our efficiency is weakened. Among the many difficult questions in higher education the question of quality versus access and efficiency is a dilemma.

Another particularly challenging issue in higher education is the tenure system. Higher education is one of the few major industries in this country that guarantees their employees continued employment. The only three reasons a faculty member can be discharged from a tenured position are: (1) Incompetence, (2) Financial exigency or (3) Moral turpitude. Imagine trying to prove incompetence in our contemporary court system! Dismissing faculty for financial reasons is no easy task either. Some type of gross moral act is a rarity. Notice there is little or no performance expectation as in a corporate climate.

Take all of the complexities we mention so far and you can see why the business of higher education is unusual at best. To further complicate this picture consider that there is a correlation between socioeconomic status and educational attainment. This country must address the issue of access contrasted by cost and efficiency.

In America we need to decide how much publicly funded higher education we should offer and can afford to offer. There is a limit to how much we can afford if we consider the total output of our country. Two ways to compare expenditures on the priorities of the nation are Gross Domestic Product (GDP) or Gross National Product (GNP). In 1993/94 total U.S. expenditures on higher education was approximately $200 billion or 3% of the GNP.

Efficiency and productivity can be reduced to a number if we can agree on how to calculate a standard cost per unit. Assuming we arrive at a standard cost per unit we can then set out to produce those units at a lesser cost. Among the many problems associated with cost per unit is whether we are measuring operations (how well we manage our work) or output (how well our customers succeed). It could be a combination of both operations and output. Since these are too complex to reach agreement we should consider what it costs to educate one fulltime

Affordability of Higher Education Page 3 of 5

student or Full Time Equivalent (FTE). This can be measured and compared to facilitate greater efficiency.

Rising costs have been one of the main factors in the problems of who pays for and who should receive assistance for further education in the U.S. The tuition increases over the past two decades are the result of over burdened state government pushing costs back on to the taxpayers by charging more and taxing more. Technology costs have been passed on to the students. Private colleges have become more dependent on gift aid to students which has required higher tuition prices to pay for the gift aid. Personnel costs and the natural increase of inflation have also contributed to the rising cost of tuition in America.

We need to consider how much of the cost burden should be carried by each of the four primary groups who pay for college: (1) Parents, (2) Students, (3) Taxpayers, and (4) Philanthropists. The key to the future funding of higher education depends on the balance between these sources of funding. If we lessen the responsibility of one source the others must pay more. All of this discussion points to the reason our higher education system is complex and will be more difficult to pay for in the future.

When considering the direction and patterns of financing higher education in any country three dimensions arise: The total resources devoted to higher education and to its traditional products of teaching, research or scholarship or service. The productivity, or efficiency, or cost per unit of the higher educational enterprise, whether these “units be numbers of students taught, units of actual learning, or new knowledge generated. The burdens of meeting these costs, whatever they may be, are distributed among parents (from part-time earning and debt), taxpayers (directly through support of institutional expenditures or indirectly, and philanthropists (through endowments and current gifts).

Any country must decide how much money and attention will be devoted to the educational enterprise. Countries which devote significant resources to higher education are better able to compete in a global economy. The citizens of the country are better able to perform jobs which are vital to the economic interests of the country. However, there is a limit to how much a country can invest. Some balance between government and private investment is inevitable.

Most often any significant investment in higher education will bring regulations. Lawmakers tend to establish a way to measure the effectiveness to better justify their funding decisions. Objective measures in higher education are difficult to identify and measure. Rather than ignore efficiency we should attempt to establish measures that can be evaluated. Perhaps the best way to measure productivity in higher education is full-time equivalent (FTE). FTE is a common way to identify one fulltime enrolled student. Using the FTE as the base we can compute many different ratios and numbers to compare and contrast efficiency.

Is higher education a business or a learning enterprise? If it is a business then what is its product? At best, we have some difficulty explaining how the economics of higher education works. The student does not know exactly what they are buying when they commit to higher education. The purchase is usually large in comparison to other investments they will make. Most of the higher education institutions in the United States are non-profit entities. Revenue may exceed expenses but no one investor is receiving a return on their money. Students generally pay less than half the actual cost of higher education. Subsidies make up the difference from government and private sources. All of this makes the business of higher education cumbersome and confusing.

Affordability of Higher Education Page 4 of 5

Revenue for higher education has been described as either donative nonprofits or commercial nonprofits. Donative revenue comes from individuals and organizations who believe in the mission of the school. Commercial revenue comes from the sale of goods and services. Universities have both types of revenue.

The market for higher education is competitive. To remain viable most universities find ways to generate new revenue streams. A university may offer classes at convenient times for students who work or may recruit students from other countries. Many private universities have found creative ways to add more money to the bottom-line out of necessity over the last few decades. Advances in technology have enabled universities to deliver their educational product in new ways.

Public universities have seen a decline in revenue over the past 25 years because public support for funding has declined. Private universities have driven their prices up by offering significant scholarships in the form of discounted tuition revenue. Both public and private universities have felt a financial squeeze because of these reasons. The result is pressure on administrators to fret over the balance between fiscal management and the ideals of the university.

The prices charged by higher education in the U.S. have increased at or above most major price indices. To emphasize an important point again, public support for spending more money on higher education has declined over the past few decades. At the same time many colleges have aspired to better themselves in the eyes of the public by becoming more selective. This has driven the price up for many universities. Colleges spend money on professors and buildings to boost prestige. Some suggest that the only way higher education can meet future needs is to see improvements in productivity. Better utilization of people and resources are essentially what universities can do to meet future resource needs.

Affordability of Higher Education Page 5 of 5