Who Subsidizes Whom?

An Analysis of Educational Costs and Revenues


Using U.S. Department of Education data, this report compares estimates of colleges and universities educational revenues and costs and finds that many colleges and universities are paid more to provide an education than they spend providing one to their students. These findings challenge the conventional wisdom which holds that the education for virtually all students is heavily subsidized. Although total university spending is often in excess of the tuition charges students pay, in reality only a portion of many institutions’ budgets go directly to educational spending, meaning that many schools spend large amounts on things totally unrelated to educating students. Ultimately, many students are left paying the bill through tuition bills which are greater than the costs of their education.

By Andrew Gillen, Matthew Denhart and Jonathan Robe | April 2011

Download the entire report (pdf, 21 pp.)

Bookmark and Share


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, as we show in this report, the conventional wisdom is wrong because it inappropriately compares only one revenue source—tuition payments—to total institutional spending. 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% of all students attend institutions where educational payments exceed educational spending. For four-year students, this figure is between 59% and 87%, and for two-year students, it is between 24% and 63%.

The Conventional Wisdom

The notion that colleges and universities subsidize students is an article of faith among many higher education administrators and lobbyists. Southwestern College President Dick Merriman made clear that the College subsidizes its students, stating that, “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.”[1] Such a view is hardly restricted to college administers; indeed, many academics hold similar beliefs. In his popular book, The Economic Naturalist, Cornell University economist Robert Frank claims, “Tuition payments cover only a fraction – in many cases, less than one-third – of the total cost of educating a student.”[2]

The Source of Confusion

The main point of our analysis in this report is to disprove the conventional wisdom that holds that colleges almost universally subsidize their students. But why is this perception so widely held in the first place?  Essentially, the conventional wisdom prevails because colleges, universities, and their proponents have a tendency to attribute all spending to the cost of providing an education.

One of the best illustrations of this mindset comes from the Dartmouth College Fund (DCF). In its fundraising materials, the DCF defends what it refers to as a “wacky” business model: selling its product at a discount, and then “begging” for money.[3] The DCF argues that “Dartmouth charges $49,974 for undergraduate tuition, room, and board, even though it spends $104,402 per student per year,” and it further argues that once financial aid is taken into account, students are paying only $14,724.[4]

Dartmouth and many other colleges spend more per student than what is received in per student tuition payments, but this does not mean that students are being subsidized because not all of that spending is used towards specifically educational purposes. While the DCF does not explain how the $104,402 figure is derived, typically, when colleges compute their costs per student, they add up total spending; this approach allows colleges to claim they are subsidizing a specific activity (in this case teaching) by comparing their total spending on all activities to the revenue generated from teaching alone. By this logic, General Electric could insist that they subsidize everyone who buys an alarm clock because their revenue from selling alarm clocks does not come close to covering GE’s costs for all products. It does not take a Dartmouth graduate to spot the flaw in this line of reasoning. Specifically, because GE makes lots of things other than alarm clocks, it is inappropriate to draw inferences by comparing revenue from alarm clock sales to all costs, such as the costs of producing jet engines, dishwashers, etc.

Just as GE makes a variety of products, colleges and universities do much more than simply teach students. In fact, the largest per student spending category at Dartmouth is $37,000 per student for “Academic Support,” not to be confused with the $15,000 per student for “Institutional support,” or the $12,000 per student for “Student Services.” Dartmouth also spends $24,000 per student on “Research.”[5] Adding all this up implies that Dartmouth is already spending $88,000 per student before even counting anything that could pass for a direct instructional cost (such as professors’ salaries). But just as we should not expect revenue from alarm clock sales to cover the costs of making jet engines, we should not expect tuition to cover research expenses. In fact, very little of that $88,000 is properly attributed to the cost of providing an education, but is only by including such spending that many colleges and universities can assert that payments do not cover costs.

Download the entire report (pdf, 21 pp.)


Notes

[1] Dick Merriman, “The College as a Philanthropy. Yes, a Philanthropy,” The Chronicle of Higher Education, October 31, 2010.

[2] Robert H. Frank, The Economic Naturalist, Basic Books, 2007.

[3] The text and movie are from: Dartmouth College Fund, You Wouldn’t Run a Business This Way. Here’s Why Dartmouth Does., and can be accessed at http://www.dartmouth.edu/~alfund/why_give/business_model_text.html. If the link or materials are later changed, we have a cached version of both the text and movie that is available by emailing the authors.

[4] The DCF obtains the $49,974 figure by summing the 2009-10 undergraduate tuition and Room and Board charges. See http://nces.ed.gov/collegenavigator/?q=dartmouth+college&s=all&id=182670#expenses.

[5] The DCF’s $104,402 figure refers to the 2009-2010 academic year, but the spending by category figures are for 2008-2009 because the Department of Education has only released data through the 2008-2009 school year.


Andrew Gillen is the Research Director at the Center for College Affordability and Productivity. He received his PhD in Economics from Florida State University.

Matthew Denhart is the Administrative Director and a Research Associate at the Center for College Affordability and Productivity in Washington, DC.

Jonathan Robe is a Research Associate at the Center for College Affordability and Productivity.