Prices, Productivity, and Investment: Assessing Financial Strategies in Higher Education

Journal of College Student Development, May/Jun 1998 by Schwarzmueller, E Beth

Edward P. St. John

Washington, DC: ASHE-ERIC Higher Education Report No. 3,1994, 160 pages, $18.00 (softcover)

In Prices, Productivity, and Investment: Assessing Financial Strategies in Higher Education, Edward St. John, professor of educational leadership at the University of New Orleans, provides a summary of extensive research examining the recent crisis in college costs and its impact on access to higher education. St. John examines in detail, a "chicken and egg" question of higher education: Which came first-higher tuition or higher expenditures? Critics claim that increases in tuition are due to waste and inefficiency and that tuition increases in fact beget higher expenditures. Educators reply that tuition increases are an attempt to cope with reduced funding by federal and state governments and the higher costs required in providing higher education today.

College and university tuition rates have increased more than the rate of inflation for the last fifteen years. One might ask why students (and parents) continue to pay these spiraling increases. The author points out that higher education continues to be perceived as a good investment. Research continues to show college graduates achieving higher lifetime incomes than high school graduates. This return on an individual's investment in tuition occurs across institutions. St. John cites the difficulty in measuring the outcomes of any particular institution. Absent outcome measures, quality is typically defined by input and prestige factors that do not necessarily correlate with productivity such as low student-faculty ratios, large numbers of library books, and a high percentage of full time faculty with doctorates. A reliance on these input factors contributes to spiraling tuition increases.

The author traces the controversy over college costs to the mid-eighties when tuition rates increased faster than the rate of inflation for several years. Congress became concerned about the effect of rising prices on access to higher education. In fact, Congress is still concerned as is evidenced by the appointment of the National Commission on the Cost of Higher Education ("House Passes Bill," 1997). The early years of higher tuition increases could be explained away by reductions in federal grants and state appropriations at the same time universities were playing catch up with faculty salaries from the previous decade when faculty salaries lagged behind the rate of inflation. St. John also points out that increases in tuition and decreases in grants in favor of loans negatively influence access by low income and minority populations, even at times when total enrollments are steady or increasing.

More recently, increases higher than the rate of inflation can be attributed to at least three factors. Total federal expenditures for grants in aid declined, and private higher education, much like Robin Hood, increased tuition rates for those who could pay the full amount in order to increase institutional aid for those who earlier would have been recipients of government grants. Some colleges show institutional aid or "discount rates" as high as 30%, i.e., institutional aid expense is equal to 30% of tuition revenue. This year most independent auditors responding to NACUBO and AICPA guidelines are requiring private universities to report revenues as "net tuition after institutional aid" which at least informs the public of this so-called Robin Hood effect.

2. Technology enhancements have allowed business and industry to reduce labor costs resulting in lower unit costs and prices. Technology enhancements in higher education have not been used to increase productivity, such as increasing the average class size or the number of students served, but, in fact, are viewed as necessary enhancements to the educational experience and to adequately prepare graduates for the information age. The result is that universities are spending more and more each year for hardware and software acquisition, technical support, and training, without realizing any apparent productivity gains.

3. The decline in the number of 18-to-22-yearolds during the last decade forced colleges and universities to compete for a smaller market. St. John reports that as many as onethird of institutions of higher education have experienced declining enrollments. More dollars were spent on marketing and providing quality services to fewer students. At the same time, instructional costs tied in many cases to the number of tenured faculty, did not change, and in fact increased the cost per student.

The author reports that another factor associated with increased costs is the growth in the number of nonteaching professionals, such as financial aid and development officers. One study cited reported administrative costs increasing from 12.5% to 19.2% of the education and general expenditures during the period from 1949-50 to 1998. In fact, student affairs professionals, recognizing the educational value of collaborative efforts between academic and student life, have increased services, such as first-year experience programs and residential colleges. The number of university personnel per student has increased as student affairs professionals have taken over some of the noninstructional roles of faculty, including student advising and tutoring. At the same time the student-faculty ratio has not decreased and the standard faculty workload continues to be the same-regardless of discipline, average class size, or research responsibilities. In fact, faculty do not see an incentive for creating more productive units. Professors are rewarded equally for classes of 15 or 30. Higher education may be the one industry in which the rate of pay for production (teaching), has no correlation with the amount earned for the product (number of students in the class x tuition).