Where’s All the Money Going?

By Andrew Gillen, Matthew Denhart, and Jonathan Robe

As they defend tuition increases to irate students and parents, college and university leaders often argue that tuition does not cover their costs and that they are therefore subsidizing their students’ educations. Take, for example, what Southwestern College President Dick Merriman said in an October 2010 piece for The Chronicle of Higher Education: 

“None of you, not even that very rare student who receives no financial aid from the college, will come close to paying what it is going to cost the college to educate you.”

However, this is emphatically not the view held by the students, parents, and many taxpayers who are paying the tuition bills. After paying thousands of dollars, students are often taught by adjuncts or stuffed into classrooms with hundreds of other students. This quite reasonably leads them to ask, “Where is all of our money going?”

So who is correct: the universities or the public?

To answer that question, we tabulated the educational spending of colleges and the payments they receive for the purpose of educating students from U.S. Department of Education data. This allows for good, though far from perfect, estimates both of how much colleges receive to provide an education and how much they spend to provide that education. We calculated a number of different revenue and expenditure estimates based on different assumptions. Comparing these revenues and spending figures reveals, unsurprisingly perhaps, that there are some colleges which do subsidize their students but that there are also many colleges which are the ones receiving the subsidy.

Table 1 below displays some of our most relevant findings. It shows “Total Educational Payments” (the equivalent of total tuition revenues, including financial aid, plus state/local appropriations) and “Education and Related Spending” (the sum of instructional and student services expenses plus an attributable portion of related indirect support costs) across different sectors of higher education.

Subtracting Total Educational Payments from Education and Related Spending yields the average amount that colleges subsidize their students (shown in the table’s last column). Negative numbers mean that the colleges receive more in revenues to educate students than they actually spend to educate them. The prevalence of negative numbers in the table above means that it is not generally the case that colleges subsidize their students—in fact, colleges are generally the ones receiving a subsidy.

Another way of to look at this is to calculate the percentage of students at each type of institution that attend colleges which spend less on students’ education than they receive in order to provide that education. Some of these results are shown in Table 2: Nearly 70% of students at public four-year colleges attend institutions that do not subsidize their students. Even at the private not-for-profit institutions (where students on average are subsidized by their colleges), 29% of students attend institutions where this is not the case.

Thus, we find that the public is indeed correct for the most part: colleges are not generally subsidizing their students. These surprising findings beg the question of why university administrators claim that the institutions are subsidizing students. A big part of the explanation is that administrators typically attribute all university spending to the cost of providing an education to their students. Yet, a moment’s reflection reveals that this is not an appropriate calculation. Universities do many things that are unrelated to providing an education, and this spending should not be counted as an educational expense. To determine who is subsidizing whom, one must compare educational revenues to educational spending, rather than total spending. Once one performs the proper calculations, it is all too evident that the majority of students are not subsidized by their colleges.

A more detailed full length study is available here.