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Making the case for the cost of college: for years, college administrators have known that their school's average tuition didn't cover a typical undergrad's

Matrix: The Magazine for Leaders in Education - November 1, 2001

The sticker price on one year of undergraduate education at the elite, private Williams College in Massachusetts is $33,000--a fire-sale bargain considering what it actually costs the school to educate an undergrad each year.

"Our cost is right around $75,000 per student, including all the capital costs," says Williams economics professor George C. Winston, who has studied the difference between college price and cost for nearly a decade.

Excluding capital costs, Williams estimates that it spends $53,000 per year per student.

"And only 60 percent of students pay the sticker price. The average net price is on the order of $22,000 to $24,000," Winston says.

Few higher education administrators will be surprised to hear that Williams, like the majority of colleges and universities in the U.S., spends significantly more on its undergraduate students each year than it charges in tuition. But communicating the difference between the price and cost of college is a tough sell, especially when tuition increases elicit gripes all around--from parents to Congress.

New Study Will Standardize Costs

Getting the message out is tough for a variety of reasons, not least is that until now every school has had their own way of calculating the difference. A soon-to-be completed project by the National Association of College and University Business Officers could help bridge the understanding gap with the creation of a standard formula for tabulating what it costs a school to educate students each year.

The simplest way to do the math would be to divide the operational budget of the school by the number of undergrads. This would cover what the school spends on faculty, administration and related expenses. But simple division leaves out the things that NACUBO calls "community costs," like an on-campus museum, intercollegiate athletics, dining halls or other auxiliary functions that lose money, says Gregory Fusco, a consultant spearheading the project for the association.

Schools must also consider the direct financial aid they provide to students and monies that fund work-study programs. NACUBO's "Cost of College" methodology, which has been tested on nearly 150 schools nationwide, takes these secondary costs into account when coming up with the cost vs. price ratio.

Adding to the accounting tangle is that many schools have graduate programs and research facilities that share resources with undergraduate schools. Separating these costs is difficult, especially for the largest and oldest institutions, experts say.

But the thorniest issue in determining college costs, and one NACUBO elected to leave out of its standard formula, are capital costs, like the value of a campus.

"If you're going to recognize the real economic costs, you have to impute the costs of consuming and utilizing a very significant economic resource," like a campus, says Winston.

Because non-profits have no way to recognize these costs using standard accounting procedures, NACUBO has opted not to include them.

"It's an interesting example, how if a school is charging $1 in tuition, and has $1.50 in costs, it may also have another 25 or 30 cents in facilities [costs] that don't show up," Fusco says.

Public vs. Private

Once the formula for how to measure college costs is agreed upon, the differences between public and private schools, large and small institutions, quickly emerge. There are a couple of rules of thumb: Public schools tend to pick up the greatest share of the tab, relying on taxpayers' dollars to make up the difference. Schools with the largest endowments can offer their students the greatest discounts in the form of financial aid.

"On average, the public sector is going to charge students a far lower fraction of the real cost of education than a private institution," Winston says. "Private institutions charge students around 40 percent [of the true cost], public institutions charge around 10 percent of the cost."

At the Montana State University, Bozeman campus, the amount the state subsidizes each student is easy to gauge, says Craig Roloff, acting vice president for administration and finance. The school is mandated to charge out-of-state students the amount actually spent on their education each year. Montana residents who were full-time undergrads paid $3,079 this semester; out-of-state students paid $9,075.

"For a resident student, the state ends up covering about 60 percent of the cost," Roloff says.

The ratio is about the same at Kingsborough Community College in New York City, but there the city and state pitch in to cover nearly 60 percent of the school's costs. At Kingsborough, tuition and fees collected for for-credit programs don't even cover the school's instructional support budget.

In a handful of states, subsidies for higher education make it difficult for private schools to compete. In Georgia, for example, students with a "B" average or better attend the University of Georgia for free, subsidized by revenue from the state's lottery.

But Berry College, a small, private institution in Rome, Ga., wants to attract the same quality students. Berry President Scott Colley says his school spends about $25,000 each year per student, and only charges $12,500 in tuition. Financial aid grants further discount the price about 42 percent, Colley says.

"I constantly harp on this theme so parents will understand they're getting a pretty good deal," Colley says. "Some parents say, `That's wonderful" I hear from other parents, `I know your arithmetic is correct, but I'm having to write a check for a lot of money.'"

Other private colleges find the laws of supply and demand allow them to charge closer to what they actually spend on undergrad students. At Macalester College in St. Paul, Minn., tuition this year is about $22,500. Macalester President Michael McPherson, who also served on the NACUBO committee, estimates that his school spends as much as $27,500 per student, or 15 percent to 20 percent more than they charge.

While public schools have taxpayer dollars, and often endowments, to make ends meet, private schools are most likely to rely on more significant endowments. A NACUBO survey earlier this year found that higher education institutions spend about 4.5 percent of the market value of their endowments each year.

Most schools say the disparity between price and cost is staying about the same, in percentage terms. The one exception seems to be public institutions, where state funding has not risen at the same rate as inflation, causing some schools to pass the difference on to students.

"For most public institutions what has driven prices up was taxpayer support going down," Winston says.

Roloff at Montana State agrees.

"It's not that state funding has decreased, but state funding does not increase at the rate of cost inflation for higher education," he says.

NACUBO's officers say they hope the availability of its "Cost of College" methodology will eventually increase public awareness of the disconnect between price and cost. But there is a potential danger of publicizing these statistics: they invite comparisons that may often be invalid.

"We've got a real problem among reporters, scholars and managers in forgetting this awesome heterogeneity in trying to do this," Winston says. "Policy makers make policies to control Harvard, then apply it to the 3,400 other schools [in the country]."

The reality is that justifying tuition increases that help keep the ratio of price-to-costs the same is difficult, never mind trying to make-up ground. And if schools aren't likely to begin charging full price for education any time soon, that's as it should be, most college administrators agree.

"It seems to me we are engaging in a set of activities that provide very substantial benefits to our students themselves, but also provide broader benefits to society," says McPherson of Macalester. "It seems right to me that the cost of this enterprise are shared between families and other supporters."

Cost of Distance Learning

Just as NACUBO is creating a methodology for determining the true cost of undergraduate education, researchers at George Mason University and University of Virginia have been working hard to quantify the cost of distance learning programs.

Their results have been eye-opening.

"When you include all the overhead, the cost of distance learning programs are more" than classroom-based instruction, says Professor Stephen Ruth, head of the International Center for Applied Studies in Information Technology at George Mason. "Just saying it costs more is real heresy. Most people assumed in the beginning you'd be able to save money at it. My guess is it costs 25 percent more."

Ruth and John Milam, a collaborator at the University of Virginia, created the GMU model for evaluating the costs of distance learning programs. Most schools can't compute these costs using traditional accounting methods.

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