How Stanford University Uses Its Wealth, With Some Notes on the Analysis of Rising Tuition

Stanford university’s annual undergraduate tuition is over $41,000 and our endowment is a gasp-inducing $17 Billion. Based on these facts, many people would argue that I work for one of those money-grubbing dens of elitism that is preventing middle class parents from providing their kids a world-class education.

Since I am a professor, let me respond to these concerns with a pop quiz. Try answering the following three questions.

1. What has been the inflation-adjusted increase in Stanford’s net tuition (i.e. tuition minus financial aid) from 1994 to the present day?

2. What is the modal amount of debt taken on by new Stanford graduates over their time at the university?

3. If your family were in the 75th percentile of American income, how much would Stanford charge you for tuition?

All three questions have the same answer: Zero.

There are many ways for a wealthy university to allocate its resources. My own I am proud to say has chosen to spend heavily on ensuring that anyone who is admitted can afford to attend. Families whose incomes are under $100,000 pay no tuition at Stanford. Families whose incomes are under $60,000 pay no tuition, room or board. Three fourths of students graduate debt-free, and the remaining fourth have an average debt less than what you would take on to buy this 2008 Toyota Highlander with 82,000 miles on it (If you are facing that choice, my strongly held opinion is that a Stanford degree will get you farther in life).

Does Stanford’s commitment to access solve the widely-reported and widely-decried problem of many families not being able to send their children to college? Of course not. We are a small university in a big nation. But Stanford’s example does suggest that nuance is required when analyzing rising college tuition.

First, focusing on tuition sticker prices is as misleading as focusing on health care prices. In both cases, few people pay the sticker price and what truly matters is the actual cost to the purchaser. In health care, that’s typically the sticker price minus whatever discount the payer has negotiated. The university parallel is tuition minus the discount the university gives through financial aid. If your family has an income of $90,000 a year, what Stanford charges on paper for tuition could just as well be $41 million and it wouldn’t matter to you because it all is discounted away by the university and you never see a bill.

Second, college cost crunch stories tend to focus on elite universities, but that may not be where the problem primarily lies. Most of Stanford’s peer universities also have generous financial aid packages that blunt the impact of on-paper tuition increases. In contrast, many less wealthy institutions raise tuition steadily but do not have the resources to offset those rises with financial aid. Their rising sticker prices thus reflect a true increase in cost.

Third, student debt is an important variable that does not necessarily bear a close relationship either to sticker price or actual current cost. When a university such as Stanford does not charge a student tuition because of family income, the student’s cost is zero in perpetuity. In contrast, when a student’s tuition is paid through loan programs the student’s cost is in some sense zero, but only for the moment. The cost has simply been deferred and will indeed increase due to interest. Analysts trying to understand the increase of net tuition should thus distinguish financial aid that truly lowers costs versus just kicking the can down the road.

[Cross-posted at The Reality-based Community]

Keith Humphreys

Keith Humphreys is a professor of psychiatry at Stanford University. He served as a senior policy advisor at the White House Office of National Drug Control Policy from 2009 to 2010.