Where Does the Money Go?

When colleges discuss their rising prices, they often protest that running a college is simply very expensive. Tuition, in fact, doesn’t really cover how much it costs to educate students.

“It’s important to remember that tuition doesn’t cover, in fact it doesn’t come close to covering, the full cost of education” said Duke University spokesman Michael Schoenfeld in February, back when Duke announced a 4.3 percent tuition hike. “The rest of the costs are made up by things like income from the endowment, fundraising and other sources of revenue.” Students weren’t paying too much; the college was extensively subsidizing their education.

Except that might not be true, or it might be a little misleading. According to research by the Center for College Affordability and Productivity, tuition payments are actually much higher than what’s needed to really educate undergraduates. Colleges actually use tuition to subsidize spending on things unconnected to classroom instruction, like research.

As the report explains:

Conventional wisdom holds that colleges and universities heavily subsidize their students. This assertion seems correct, given that total spending per student is almost always in excess of per student tuition payments. However… such a comparison is seriously misleading because institutional spending encompasses far more than just the educational expenditures that tuition revenues are ostensibly designed to cover. The more logical comparison—and the one which we make here—is between what colleges and universities are paid to provide an education versus what those institutions actually spend to provide that education.

In many cases student tuition and third-party payments on behalf of students easily cover the portion of spending that is actually used for educational activities. Between 52 and 76 percent of all students attend institutions where educational payments exceed educational spending. For four-year students, this figure is between 59 and 87 percent, and for two-year students, it is between 24 and 63 percent.

The problem here, and the reason that there’s confusion, is that colleges habitually assume that all of their spending constitutes the cost of providing an education. If this is true tuition doesn’t really cover university education. But that’s not really true, explain the authors of the report: “This does not mean that students are being subsidized because not all of that spending is used towards specifically educational purposes.”

The report estimates the true cost of an undergraduate education (“instruction”) based on faculty salaries and a share of other expenses, including academic support and operation and building maintenance.

In fact, if one counts only expenses related to undergraduate education, according to the somewhat mysterious formula used by the Center for College Affordability and Productivity, “public four-year institutions… are paid more in tuition than they spend on providing an education and are able to use excess funds for other purposes.”

Whether this means students and their families are being “misled and overcharged,” as the report argues, rests on the assumption that these other things (things like research, administration, and buildings, don’t really matter to education. That’s certainly an arguable point, but it’s by no means obvious.

At the majority of private institutions, however, colleges are still spending more to educate students than they derive from tuition.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer