The October 2011 issue of American Enterprise Institute for Public Policy Research’s (AEI) Education Outlook included an interesting analysis of the total cost of a bachelor’s degree titled, “Cheap for Whom?: How Much Higher Education Costs Taxpayers.” The authors, Mark Schneider and Jorge Klor de Alva, go beyond a surface analysis of tuition rates, student fees, and books. Their analysis delves deeper into the overall financial cost model to consider and analyze taxpayer subsidies as part of the cost of a bachelor’s degree.
Schneider and de Alva note that consumers are largely oblivious to the cost of an item, focusing almost solely on the price instead. As long as the price seems reasonable (or, at least comparable to other similar products), the consumer is not likely to consider what the actual cost of the product is. As the authors point out, nowhere can this be seen more clearly than in higher education. Since the downturn of the economy in 2008, a deluge of articles have been published exploring the price of a college education (see the “Impact of the Economy on Higher Education” section of this blog) but little has been written for the American public about the true cost of a degree (that data is typically buried in academic policy and research reports that typically do not receive broad media coverage). Schneider and de Alva have undertaken the daunting task of publishing the total cost of a bachelor’s degree for the American taxpayer. Their findings are notable, assuming that those in a position to influence public policy and a broader national discussion read their paper.
The authors divided their sample into the following categories: public, private not-for-profit, and private for-profit institutions. Beyond that, they used a variation of the well-known rankings reported in Barron’s Profiles in American Colleges which provides six categories for schools ranging from “noncompetitive” (open admissions schools) to “most competitive” (highly selective, elite institutions). Interestingly, American taxpayers subsidize the least competitive schools far less than they do the most competitive. The irony is that the largest and fastest growing sector of the college population includes low-income and non-traditional students who are attending the lesser competitive schools. These schools tend to offer greater flexibility for part-time students, working adults, and other “nontraditional” student populations. To provide perspective on the dramatic differences in taxpayer subsidies, consider that “among not-for-profit institutions, the amount of taxpayer subsidies hovers between $1,000 and $2,000 per student per year…” Among the most selective institutions in the nation, “the taxpayer subsidy jumps substantially to more than $13,000 per student per year.”
The amount of return (ROI) is important when considering any investment and can mean the difference between whether one makes an investment or not. In the case of higher education and the taxpayers’ “investment,” the return is far lower than necessary to justify the current subsidy trends of the more highly subsidized institutions. “For public institutions, taxpayers are investing more than $60,000 for each bachelor’s degree granted in the three less competitive categories, close to $75,000 in the highly competitive institutions, and more than $100,000 for each bachelor’s degree granted in the most competitive flagship institutions.” In the less competitive schools, high dropout rates and longer time taken for completion of the degree decrease the taxpayers’ total ROI. The highest dropout rates, however, tend to be found in the lesser competitive institutions – the same institutions receiving the least taxpayer subsidies (or none at all in the case of private for-profit institutions).
According to their research, bachelor’s degrees earned from the private for-profit institutions offer the highest ROI for taxpayers since so little taxpayer money is invested into those schools. The authors also consider the income taxes paid by those without and those with bachelor’s degrees. Data shows that individuals holding a bachelor’s degree have lifetime earnings substantially higher than individuals without a college degree and therefore pay more in taxes, providing a benefit to the taxpayer.
For example, because for-profit institutions receive no state appropriations but pay income taxes, there is a “net ‘profit’ to the taxpayer” for bachelor’s degrees earned at schools within this category. Table 2 in the report shows that there is a benefit of approximately $6,100 to the taxpayer and over the degree holder’s lifetime, taxpayers will realize a net benefit of approximately $60,900 thanks to higher taxes paid by the graduate holding a bachelor’s degree from a for-profit institution. By contrast, at a public school (non-/less competitive category), the taxpayer will subsidize approximately $6,000 per bachelor’s degree per year and ultimately see a total cost of $67,600 per bachelor’s degree. Over the lifetime of the graduate’s career, the taxpayer will not see a positive ROI for subsidies provided for the benefit of the degree-holder. The ultimate net cost to the taxpayer for a bachelor’s degree earned from a public school in the “non-/less competitive” category is $7,500.
In concluding, the authors make several recommendations that are worth re-iterating here. First, they encourage stakeholders to focus efforts on addressing issues of college completion and retention. This makes sense considering that the bulk of taxpayer costs associated with degrees earned at the lesser competitive schools (where the majority of students are earning degrees) is a result of high dropout and slow completion rates. Additionally, the authors recommend that policymakers reverse “the current policies that result in providing the lowest levels of taxpayer support to the institutions that enroll the highest percentage of low-income, nontraditional, and minority students…” Providing additional monetary incentives to these students can help boost the college completion and retention rates, ultimately benefiting the taxpayer as degree holders earn more and pay more in income taxes over the course of a lifetime. The authors point out that if the Obama Administration’s “completion agenda” is met, taxpayer ROI at the lesser competitive schools where dropout rates are highest will increase. The authors also recommend that policymakers take notice of the Lumina Foundation for Education’s Guide for State Policymakers which calls for states to make strides in expanding and strengthening “’lower-cost, non-traditional education options,’” including online education. Finally, the authors note that little data has been collected regarding the true and complete cost of a bachelor’s degree. By understanding the real and total cost of the educational product as well as the price, policymakers can gain a better understanding of the true financial picture of higher education.
