The Delta Cost Project recently released a report titled, “Trends in College Spending: Where Does the Money Come From? Where Does it Go?” The report is enlightening given the well-documented increases in college costs combined with the current financial crisis.
The Forward to the report, written by Delta Cost Project’s Executive Director, Jane Wellman, notes that “Our country needs to increase capacity and improve performance in higher education. We can’t allow the funding crisis to justify rollbacks in access or quality.” The report utilizes the Integrated Postsecondary Education Data System (IPEDS) data provided by all institutions of higher education to the U.S. Department of Education, but the authors admit that “private for-profit institutions, an important and growing sector in American higher education, are excluded from the fiscal analyses because of the poor quality of trend data for these institutions.”
Between 2002 and 2006, “overall postsecondary enrollments increased by more than 1.6 million students,” representing “the greatest five-year growth since the baby boomers headed to college.” With such significant increases in college enrollments, the information about college costs contained in the report should be able to illuminate whether or not the incremental enrollments were folded into the system at a fully loaded cost per student or an incremental cost. The report notes that it did not prepare fiscal analyses of the private, for-profit sector (of which APUS is included) despite the fact that this sector and public community colleges have seen the largest enrollment increases during the period under review.
Non-profit colleges and universities receive funds from multiple sources including: tuition and fees, state and local appropriations, endowments, federal funds, private gifts, and bond revenues. Depending on the type of institution (public or private), any specific university will receive funds from some but likely not all of the sources listed.
The report notes that when considering the impact of tuition increases on consumers, it is important to understand how tuition received from students and their families are spent. “Tuitions go up for two basic reasons: to pay for real increases in overall spending, or to substitute for revenue declines elsewhere in an institution’s budget” according to the report. The latter reason for a tuition increase is known as “cost shifting.” Cost shifting can be utilized as a budgeting strategy by public institutions when state and local appropriations dwindle. The art of cost shifting is only possible in a market where the consumers are not price sensitive since the funds received from increased tuitions are not used to increase the quality of education received by students but are instead used to supplement dwindling funds available for other fund-generating elements of many public institutions, including hospitals and other services. According to statistics provided by the Delta Cost Project, “about 92 percent of the increase in (public institutions’) student tuitions since 2002 can be attributed to shifts in revenue, while 8 percent went to actual increases in spending.” In short, in cost shifting situations, the student pays more to attend the school but sees little return on his money since the funds are not used to increase the quality of education provided.
As the report points out, what makes the current situation in college spending so interesting is that it seems to fly in the face of established business practices particularly in the technology arena, namely that of “providing service at a lower cost without reducing quality.” Considering the financial crisis facing our nation and, in turn, individual students and their families, the report warns that if colleges and universities are to continue to attract students, they will be forced to reconsider their traditional attitudes toward spending. The amount spent per student by institutions portrayed in this report is decreasing while increasing tuition funds are being used for items other than those related directly to increased access and the quality of education received. In any open market, it is unlikely that a consumer would continue to pay increased prices while receiving a lower quality product or a product with no increased benefit or features.
Higher education has only been able to get away with this unique situation defying normal market conditions because post World War II American college students and their parents have acknowledged the importance of a college education in securing a strong financial livelihood. As the current financial crisis continues and students are forced to make college choices based increasingly on cost, higher education in general will likely be forced to reconsider non-ROI spending practices and cost shifting in order to continue to attract students or maintain enrollment levels. The conclusion of “Trends in College Spending” sums up the situation nicely: “The trends documented in this report show that the incremental approach to budget balancing has put our nation on a path of disinvestment in core capacity in much of higher education – a pattern that is only revealed by looking at broad metrics that examine revenues in relation to spending, enrollments, and results.” Speaking on behalf of an institution whose single source of revenue is tuition, it’s about time that more institutions are required to focus on spending on quality initiatives that improve student outcomes. The student, or the consumer, should always benefit from tuition increases.