The Tuition Story That Never Dies

Some commentaries on higher education appear year after year, almost unchanged. One of these hardy perennials is the story that tuition and fees don’t come close to paying for the actual cost of educating college students. In his popular book, The Economic Naturalist, Cornell University economist Robert Frank claims that tuition payments cover only a fraction of the total cost of students’ education. The Dartmouth College Fund defends what it refers to as a wacky business model: selling its product at a discount, and then–begging for money. Similar articles are here and here.

Last week The Chronicle of Higher Education ran one of these stories “Hey, Students, Your Education Costs More Than You Might Think,” referring to Hamilton College.

First, some background. From the story:

Hamilton organized “STOP Day,” for “Starting Today Others Pay.” Held last month, the day fell about two-thirds of the way through the academic year–significant because net tuition and room and board cover about two-thirds of the college’s budget…

The idea that the cost of providing a college education outstrips its sticker price is well known in higher-education circles. But students, including the full-pay ones shelling out $53,470 for tuition, fees, and room and board this year at Hamilton, are often incredulous at that news…

Hamilton’s budget is $115-million, she explained. Divided by the enrollment, 1,812 students, that comes to a cost of about $63,500 each. Then, subtract the $53,470 the college charges in tuition, fees, and room and board: “Each person, even a full-pay student, gets at least a $10,000 scholarship,” [Karen L. Leach, vice president for administration and finance] said…

The students should be incredulous, because they are most likely being misled. It is always difficult to analyze a college’s budget, since many important financial facts are not on the table. Without access to Hamilton’s internal finances, it is hard for an outsider to be precise. However, using Department of Education data, we can examine a very similar question, namely, for the 2008-09 school year, was a student who paid full tuition and fees subsidized by the school? All the following figures refer to the 2008-09 school year. (Note that for data availability reasons, I’m excluding both revenues and expenditures for room and board, which were included in Hamilton’s claim.)

Tuition and fees were $38,600.

Spending (per student) in each category was
Instruction: $24,173

Research: $788

Public Service: $100

Academic Support: $7,199

Student Service: $6,339

Institutional Support: $8,999

Other: $1,657

Essentially what Hamilton is doing is summing all these expenses ($49,255), and then saying they are greater than tuition and fees. This is true, but more importantly, it’s nonsense. We wrote a whole report on how this kind of argument is simply Enronesque. To wit:

it inappropriately compares only one revenue source–tuition payments–to total institutional spending. Such a comparison is seriously misleading because institutional spending encompasses far more than just the educational expenditures… By this logic, General Electric could insist that they subsidize everyone who buys an alarm clock because their revenue from selling alarm clocks does not come close to covering GE’s costs for all products. It does not take a Dartmouth graduate to spot the flaw in this line of reasoning. Specifically, because GE makes lots of things other than alarm clocks, it is inappropriate to draw inferences by comparing revenue from alarm clock sales to all costs, such as the costs of producing jet engines, dishwashers, etc. Just as GE makes a variety of products, colleges and universities do much more than simply teach students…

We could have a whole debate about what portion of those costs should be included in calculating the “cost of providing a college education.” For starters, we’d probably want to use net tuition revenue per student (estimated to be $28,057) rather than published tuition. But we’d also need to account for the fact that “instructional” spending includes any research that is not externally funded. Thus, the vast majority of research spending in incorrectly classified as instructional spending, meaning the $24,173 figure is a massive overstatement of instructional costs (This is not Hamilton’s fault – the Department of Education forces every school to report spending this way).

Then there is the issue of how much from the other cost categories should be included. One could make a very good argument that much of the other spending shouldn’t be counted. For instance, higher education in general is widely viewed as being bureaucratically bloated. The combined academic support, student service and institutional aid spending for the typical student at a four-year college is $9,554. At Hamilton, it is $22,537. So consider the extra $12,983 that Hamilton spends above an arguably already bloated baseline: is it really best thought of as a valid cost of providing a college education, or an indication that Hamilton College sticks out as being bureaucratically bloated even by the standards of a bureaucratically bloated industry? Given that they apparently have the budget for administrators to go about making claims of questionable quality, I’m leaning towards the latter.

If I were in a particularly nitpicky mood, I might even ask whether the cost of the pizza and cookies for the event publicizing STOP day (presumably paid for by the college) are a valid cost of providing a college education.

To be clear, there is plenty of room for reasonable people to disagree on how much of Hamilton’s budget can be appropriately attributed to the cost of providing a college education. But taking the entire budget and dividing by the number of students, as Hamilton did, is inappropriate.

Let us now turn to Hamilton’s accomplice. It takes an unhealthy amount of uncritical acceptance to take all the claims Hamilton made at face value. This is perhaps excusable for students, but not for The Chronicle of Higher Education. Skepticism was totally absent from this article. Just about everything the college said was accepted without question, and without any bothering to verify. The first example is the claim discussed above. A second is the reason for why the college doesn’t spend more of its endowment to lower costs for students:

Hamilton believes in “intergenerational equity,” she said, making sure that today’s students don’t benefit at the expense of those yet to come.

There is not yet a consensus on what payout rate maintaining “intergenerational equity” implies. But anything lower than 5% (some say even higher) should at least raise eyebrows. If Hamilton has a payout rate equal to institutions with a similar endowment (5.2%), than a $618 million endowment and an enrollment of 1,812 implies endowment spending of at least $17,736 per student, assuming steady enrollment. Anything lower than that indicates that the college is likely putting more weight on expanding their asset base for the future than in meeting current expenses. The story does not indicate what Hamilton’s endowment spending is, and their statement is taken at face value. It is certainly possible they are spending this much already, or have good reasons not to. But it should not be simply assumed that one of those is the case.

But perhaps even worse than uncritically accepting everything is the entrenching of dubious claims, such as this:

The idea that the cost of providing a college education outstrips its sticker price is well known in higher-education circles…

Yes, and it was once well known that the world was flat, but that doesn’t make it true. I have not seen anyone making this claim who doesn’t take total spending as equivalent to the cost of providing a college education. But that is clearly incorrect. There are many areas where it is appropriate for a college to be spending money, but in which it is also inappropriate to think of that spending was being a cost of providing an education.

An upper boundary of educational costs is established by the Delta Cost Project’s Education and Related cost attribution procedure. Other approaches, including our study, try to correct for the upward bias of Education and Related numbers. Regardless of which approach you use, it is clear that well known does not equal true, particularly for private four-year non-profits (see Tables 4 and 5 and Figure 1).

Alas, the bottom line here is that we’ve got a leading college making a series of questionable claims that are uncritically accepted by a leading industry newspaper. Is it any wonder that higher education is such a mess?