In a prior post, I noted that much of the pure “education” delivered by a college or university is alternatively available from other sources for little or no cost. What then are all of the tuition dollars, state funding dollars and student loan dollars paying for? If we are looking to fund “free college for everyone” then where is that money going exactly? Probably not where you think. In this post I will look at levels of “top line” college and university revenue, and subsequent posts will then break down the most significant component costs balancing out that revenue.

I also noted in that post that, while “education” itself does not meet the definition of a conventional product where the student/consumer is willing to “pay more to get more,” the idea of the credential as a product does meet that definition. Some people are willing to pay a lot more for a top-tier university degree than for one from the local community college, but in both cases students often “optimize their efforts” in order to get that credential with the least effort possible.

Hopefully, the conventional learning required for entry-level success in the student’s chosen field of study comes along in the process of obtaining that credential. Faculties and accrediting agencies attempt to maintain some correlation here, but young people usually choose a college or university using criteria other than the basic knowledge expected to be transferred. The social network, the campus experience, and the athletic competitions are all inextricably intertwined with basic education into “the total college experience.”

In seeking that higher education credential, the relationship between price paid and value received, either in the form of an education or a credential, is not a linear one. A Kia automobile and a Mercedes will both get you to where you need to go, but the upward-bending price curve on automobiles has more to do with social prestige than either basic transportation needs or even direct manufacturing costs. My first “real job,” obtained while I was still in university, was in the auto industry, and there I watched how Mercury Marquis and Lincoln Continental automobiles were manufactured on the same assembly lines in Wixom, Michigan, sharing many of the most expensive parts, but with widely different price tags.

The same is true with higher education. Just as the differential price paid for that automobile is more correlated to some fuzzy “brand perception” than the actual cost of the automobile, so also is it the case that the cost of a university education is most closely correlated to “How much are you willing to pay?”

College costs and “the commons”

“Nearly-free college” is not really a new concept, and historically it was not just a Democratic Party talking point. Up until about 1970, tuition for in-state residents at most branches of the California State University system was free, and it was not until 2011, through administrations managed by both Republican and Democratic governors, that students paid more in tuition than the level of per-student state funding allocated to each school in the system. I wrote in an earlier post that 1960s Michigan Republican Governor George Romney (Mitt’s father) and his 1970s successor William Milliken presided over a major capital expansion of state universities, and yet also maintained a funding system where academic scholarships, based on merit, could pay for up to 100% of tuition. Also, state room and board grants were based on family financial need at a level that could cover nearly all of these costs for many families.

In the last thirty years, however, legislature-appropriated education funding, which is the wide distribution of college costs among the much larger “commons” of the state, has declined in every state, with more and more of the costs targeted to the “users” of the system, the individual students. This move accounts for much of the rise of college costs borne by families, but not all of it. This is similar to many shifts in health care costs, and why, as I noted in an earlier post, a short ambulance ride can cost $2000. We have shifted many “fixed costs” in education as well from “the commons” to “the users,” a much smaller pool of people required to bear increasing costs.

The forgotten role of private colleges and universities

I have yet to see a “free college” plan that recognizes the important role of private colleges and universities, yet these institutions make up an important part of the nation’s college and university system. In Iowa alone, for instance, there are twenty-five members in the Iowa Association of Independent Colleges and Universities, many going back in history over 100 years, and they range in size from 500 to 6,000 students. These institutions, similarly found in every state, act as an important “relief valve,” keeping a substantial number of students out of the cash-strapped state-funded systems.

Although some state-funded and federally-funded financial aid does apply to these schools, private college and universities are much more dependent than state schools on student tuition, income from gifts and endowments, and support from affiliated religious institutions.

I’ll ignore for now the troubled for-profit college business, although the U.S. Department of Education under Betsy DeVos has been trying hard to undo the attempts from the Obama administration to rein in the worst abuses of this sector. There have been some very “good actors” historically in this space, and too many “bad actors” currently, but they are also part of the “credentialing system” in the U.S.

The “rack rate” versus net tuition dollars

I wrote in an earlier post about how all medical providers have in their billing systems a nominal set fee for each service provided that is similar to the mythical “rack rate” posted on every hotel room door, or the “sticker price” on a new automobile window that very few people actually pay, College tuition is similar, and this form of mythical “rack rate” is what engenders a lot of fear in opponents of “free college.” In short, it looks much higher than it actually is.

From my recent brief survey of current “rack rate” tuition charges, mid-tier public universities in the U.S. currently publish tuition and fees in the range of $8,000 to $12,000 per year, with top-tier public universities usually charging higher rates than that. However, past surveys have found that public universities “discount” this rate for selected students by an average of 12-13%, although that discount rate appears to have grown in more recent years.

Private colleges and universities, unfortunately, have worked their way into a difficult-to-escape trap of quoting very high “rack rate” tuition charges, usually ranging from $25,000 to $50,000 per year for mid-tier schools, but they offset these nominal charges by an average discount approaching 50%, bringing them, after discount, much more into a competitive pricing range with public universities. [1] The “trap” is that, just as some medical facilities have experimented with lower “sticker prices” only to find the insurance companies and Medicare demanding more discounts on top of their those lower rates, colleges and universities who have experimented with opting out of the “high sticker with high discount” strategy have usually found net tuition receipts have failed to keep up with their costs.

Room and board costs are similar between private and public schools, usually more dependent on local costs of living. In order to bring students to their universities, admissions officers can usually quickly put together “the individualized package” for any one prospective student based on the FAFSA (the universally-used Free Application for Federal Student Aid), which determines a family’s expected contribution toward tuition and other costs. Starting with gross tuition, fees, room and board charges, an estimation of levels of government aid, some from the state and some, like Pell Grants, from the federal government is subtracted out. After that deduction come various school specific discounts, often nominally awarded for academic merit, sports, or extracurricular activity participation. Finally, the level of student loans available from federal and other sources are estimated.

There are usually two reactions to that presented “package” from students and, especially, their parents:

• “Wow, look at that crazy-high top line!” and
• “Wow, look at the those huge discounts they are giving me!”

And of course, the dangerous parts of that package for both public and private schools are local and federal student loans. Estimates for accumulated student loan balances for college graduates now average around $40,000, and debts of well over $100,000 are not uncommon.

And so, how much of those sky-high tuition dollars (even after discounts) are going to pay the professors teaching my child? Again, likely not as much as you think, and that is the subject of an upcoming post.

At any rate, there are three important factors often ignored by the opponents of the “free college” advocates, as cited above: (1) there once was a time when Republican states funded “nearly-free college,” so this is not an unprecedented, (2) the relevant “price” that needs to be evaluated in the “net after discount” price rather than the more touted and much higher “sticker price,” and (3) we still need to look at whether all of the dollars spent are really delivering either a better “education” or a better “credential.”

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Part Three of this series of posts, on the “fixed cost dilemma” in education funding, has now been posted.

Notes:

1. Seltzer, Rick. “Discount Rates Rise Yet Again at Private Colleges and Universities.” Inside Higher Ed, 16 May 2016.