Financing Higher Education: Who Should Pay and Other Issues
Revised February 1997
D. Bruce Johnstone
A chapter for Philip G. Altbach, Robert O. Berdahl, and Patricia J Gumport, The American University in the 21st Century: Higher Education and Society,
Third Edition

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Financial Issues: Scope and Complexity

The funding of higher education is a large and complex topic. It is complex in part because of the multiple sources of revenue and the multiple outputs, or products, that are only loosely connected to these different revenue sources. It is further complex because these revenue and expenditure patterns vary significantly by types of institution (university, four-year college, two-year college), mode of governance (public or private), and by state. Within the private sector, expenditure levels as well as patterns of pricing and price discounting vary greatly by institutional wealth and by the depth, demographics, and family affluence of the applicant pools. In the public sector, these patterns vary as well according to state funding levels, tuition policies, and enrollment limits set by state governments or by public multi-campus governing boards.

The topic is also large because finance underlies so much of the three overarching themes of contemporary higher education policy: quality and the relationship between funding and quality in any of its several dimensions; access, or the search for social equity in who benefits from, and who pays for, higher education; and efficiency, or the search for a cost-effective relationship between revenues (particularly those that come from students, parents, and taxpayers) and outputs, whether measured in enrollments, graduates, student learning, or by scholarly activity of the faculty.

Within these broad themes lie public and institutional policy issues that are better informed, if not definitively answered, by economic and financial perspectives. How, if at all, can costs--especially to the taxpayer and to the student--be lowered without damage to academic quality or to principles of access and participation? What are appropriate ratios of students to faculty and to professional and administrative staff at various kinds of institutions, and what are reasonable conceptions and expectations of higher educational productivity? How can institutional aid, or price discounting, be used to maximize net tuition revenue in the private sector? Are taxpayer dollars in the public sector best used to hold down tuition, or should they go toward expanded need-based aid, with public tuitions raised closer to the full average costs of undergraduate instruction? Are public aid dollars best used for grants or loan subsidies? What of public aid based on academic promise or performance rather than family need? And what is the appropriate response by institutions and governments to the pervasive condition of austerity in higher education, whether brought on by declining enrollments, declining state assistance, or runaway costs?

This chapter will concentrate on American higher education, even though the financial principles and problems are much the same world-wide, and even though our understanding of the particular financial conditions and problems of American higher education can be sharpened by noting what is peculiar to the financing of the American university: e.g., the sheer size, and consequent accessibility, or what the Europeans call "massification;" the large private sector that includes both the most and the least prestigious institutions; and the great reliance on non-governmental revenue--mainly tuition, but also including private gifts and return on endowments--characteristic of both public and private colleges and universities.

The chapter will also concentrate on the question, "who pays and who should pay, as between student, parent, taxpayer, and philanthropist?" But that question, along with the other two overarching questions--"how much higher education?" and "at what cost or level of efficiency?"--can be adequately addressed only within the broader context of American society in the late 1990s.

The Economic, Social, and Political Context

Although the economic, social, and political context cannot be done justice in such exceptionally broad strokes, three themes seem critical to understanding the financial issues of American higher education, and especially the question of "who shall pay?"

The Economic Context: an economy increasingly oriented to high technology, information processing, and sophisticated analytic/managerial skills. Higher education is recognized both as an engine of economic growth and as a gatekeeper to individual positions of high remuneration and status. Advanced education--particularly in high technology, information processing, and sophisticated management and analysis--is thought to be essential to maintaining America’s economic position in the increasingly competitive global economy. It follows that most jobs of high remuneration and status will require an advanced degree, probably beyond the baccalaureate, and it further follows that the lack of any postsecondary education creates a likelihood of marginal income and status. These propositions, however, do not, mean that advanced education necessarily makes individuals more productive, or that all recipients of such advanced education will in fact find remunerative, high-status employment. Higher education can make individuals more productive; but it can also simply screen, or select, for the kinds of intellectual social, and personal characteristics that are requisite for the high-remuneration, high-status jobs that may be available. In short, higher education is essential for most good jobs, and the absence of education beyond high school will be an increasingly formidable barrier to obtaining them, but the mere possession of an advanced degree in the future will guarantee neither good, nor lasting, employment.

The Social Context: a society increasing polarized by class and race/ethnicity, with a large and increasing number of children growing up either in isolated rural poverty, or in urban ghettoes, surrounded by crime and violence, dysfunctional families, and failed schools. The dilemma presented by higher education’s "gatekeeper" function is that access to, and especially success in, college and university remains highly correlated with socioeconomic class. Although American higher education is undoubtedly more accessible than the higher education systems of any other country, at least in the absence of rigorous academic barriers, and also given substantial need-based financial assistance, this correlation has not significantly diminished in recent years Thus, with the increasing polarization of income in the 1980s and 90s, and with the increasing "life stakes" to success in college, there is reason to be alarmed at the degree to which our colleges and universities--for all their genuine efforts at enhancing access and diversity--in some ways perpetuate, and even accelerate, the intergenerational transmission of wealth and status.

The Political Context: a society, or at least a voting electorate, that is becoming increasingly conservative. Key elements of this conservatism include resistance to the notion of a benign government, to social welfare programs, and to transfer payments for what are perceived as the "undeserving poor." Insofar as there is to be a "public agenda," it is to be advanced, as far as possible, through reliance on private, or at least market-oriented, mechanisms: e.g., economic development zones for urban revitalization, charter schools and vouchers for education reform, or tuition tax credits and portable need-based aid to increase accessibility to higher education. A third element of this resurgent conservatism is increasing concern over crime and moral laxity, coupled with a diminishing inclination to view social deprivation or racism as an acceptable excuse for "deviant" (i.e., non-middle class) behavior.

These themes are intertwined, of course. For example, the political inclination to seek private solutions to what used to be viewed as public problems is given impetus by declining public revenues--which, in turn, is a function, at least in part, of the globalization of the economy and the increasing propensity of wealthy individuals to flee to low-tax havens and to move their enterprises to low-wage economies. There are also internal inconsistencies among these themes: for example, the increasing dissatisfaction with governmental intrusion contradicts, in some ways, the demands for more costly and intrusive accountability, as well as with more direct political intervention into matters of curriculum and programs. But these economic, social, and political themes, in all their complexity, provide a context for consideration of the three broad issues of higher education finance, to which we next turn.

Three Broad Issues of Higher Education Finance

The key issues or questions regarding the financing of higher education can be structured around three broad issues, or questions:

1. The size of the nation’s higher educational enterprise: or how much publicly-supported higher education does the nation need, or will it choose to afford, measured either in total expenditures or in a percentage of the nation’s gross domestic product?
2. The efficiency or productivity of this enterprise: that is, what should higher education (particularly public) cost per unit--whether the unit in question is to be students enrolled, degrees granted, scholarship produced, service rendered, or combinations thereof?
3. The sources of revenue to support this enterprise: who pays for the costs of higher education, as among parents, students, and government or taxpayers, and philanthropists.

The Size of the Enterprise

The American higher education enterprise is enormous, even when controlling for our great wealth and population. For example:

• Total current fund expenditures for all institutions of higher education in 1993-94 were $ 173,350,617,000, of which total education and general (E&G) expenditures (that is, excluding institutionally-provided room and board, other auxiliary enterprises, university hospitals, Pell grants, and certain other expenditures) were $136,024,350,000.

• The total expenditure on higher education, including all institutional current funds expenditures plus additions to plant value, or about $200 billion, is about three percent of the nation’s gross national product. Among the G7 highly industrialized countries, US public higher education expenditure as a percent of gross domestic product is second only to Canada, and we spend more of our resources on public higher education than does France, Germany, Italy, Japan, or the UK. (Our per-student expenditures, however, are less than those of most other affluent nations.)

• A total of 14,305,658 students, full and part-time, were enrolled in the fall of 1993. These students included 62 percent of all high school graduates from the immediately preceding year. Thirty one percent of all young people age 22-24 and 60 percent of all young people age 18-19 were in some postsecondary institution in 1994. Finally, 22 percent of all persons over the age of 25 claimed in 1994 to have completed at least four years of college.

• These students were enrolled in 3688 colleges and universities, including 1641 public and 2047 private institutions, enrolling 11,184,080 and 3,116,570 students respectively. In addition, some 1,027,713 students were enrolled in some 6737 non-collegiate postsecondary (mainly short term vocational) institutions, more than 5000 of them proprietary.

By these and other measures, it is clear that America has chosen to support a large, accessible (both in cost and in admission standards), and highly diverse system (some would say a "non-system") of higher education. These "choices" are made in the form of literally millions of decisions by parents and students to pay the costs of college, thereby giving expression to the value they place on higher education for themselves or for their children, and by even more citizens and elected officials, mainly at the state level, who spend tax funds to maintain public colleges and universities, to provide assistance, mostly via student aid, to private colleges and universities, and finally, to support an academic research enterprise that is far and away the largest and most productive in the world.

Forces for expansion of higher education

As the nation approaches the millennium, four forces will expand this already large enterprise. The first is an expansion of the age 18-24 college-going age cohort. Between 1996 and the year 2006, the traditional college-going age cohort will increase by about 16 percent. The middle age cohort will continue to decline as the low birth rates of the 1960s and 70s work their way through, resulting in a possible decline in non-traditional enrollments. Projections of enrollment growth between 1996 and 2006 by the National Center for Education Statistics range from a high estimate of 27 percent to a low estimate of four percent, with a middle estimate of 14 percent, or a projected enrollment growth for the decade of just under two million students. This growth will occur unevenly, concentrated mainly in the high growth states of the west, southwest, and south. Probably nowhere is there such anxiety over a state’s ability to accommodate a projected explosion of student enrollments as in California, where experts are forecasting a "Tidal Wave II," in which the colleges and universities of California may need to accommodate at least 450,000 additional students over the next decade, at a projected additional cost in 1995-96 dollars of as high as $5.2 billion annually if California is to maintain its historic accessibility to publicly-supported higher education.

A second force for more higher education is an expansion of participation and completion due to a perception of higher private rates of return and the perceived need for at least some higher education for positions of remuneration and status, as described in the economic context, above The currently very high attrition in US colleges presents a potential significant enrollment increase, should efforts to reduce this attrition prove successful, even without any expansion of first-time participation.

A third force, related to the above, is the accretion of the level of the degree sought by the average student. This phenomenon is probably a function of the increasing amount and complexity of knowledge, the increasing educational demands of the productive economy (whether for actual skills, or simply for higher education’s screening function), and the tendency of most professions to enhance their status by requiring ever more education prior to entry, and perhaps more continuing education to maintain current licensure.

A fourth force, identified more through assertion and conjecture than hard evidence, is the incentive for enhancement that seems to be built into the traditions of the academy. Massy and Zemsky identified this force as "the ratchet." It is in addition to any expansion of enrollments. It is an expansion of unit costs--and presumably of quality, at least by some measures. It manifests itself in a perpetual dissatisfaction, on the part of professors, staff, and administrators alike, with the status quo, and a determination to do more and better: to teach new materials, to advise and counsel students more effectively, to perform more sophisticated (and usually more costly) research, and generally to advance in the highly competitive pecking order of individual and institutional scholarly prestige--without regard to whether the more and better is either cost-effective or is demanded by those who must pay the bills.

The Efficiency or Productivity of the Higher Education Enterprise

A second set of issues surrounding the financing of higher education is the efficiency or productivity with which all of these resources are employed in the higher educational enterprise. Productivity and efficiency look at both costs, or expenditures, and at benefits, or outputs. These concepts deal with costs per: whether per student (which, of course, is not really an output, but which has the advantage of being easily and unambiguously measured), or per unit of research, or per unit of learning (however measured), or per learning added by the institution. Because the real outputs of the university (the discovery, transmission, and promulgation of knowledge) are both multiple and difficult to measure, and because revenue, at least for the support of instructional expenditures, follows student enrollment in both the public and the private sectors, the cost per student inevitably and overwhelmingly dominates approaches to questions of productivity and efficiency. But we ought never to forget that enrollment, however measured, and however sensitive this measure may be to fields of study, levels of education, or methods of instruction, is still merely a proxy for the hard-to-measure real output, which is student learning.

Variation in unit costs: the unclear technology and indeterminate production function of higher education

In the production of goods, there are usually multiple ways of combining productive inputs--mainly different combinations of labor, capital, materials, and managerial effectiveness--to produce a unit of output. The particular combination of inputs that is the most efficient is determined by the alternative manufacturing technologies and the relative costs of the inputs. Given a set of input costs and a set of technologies for combining inputs into desired outputs, there is an unambiguous most efficient way: that is, a lowest cost per unit. The efficiency, then, of any alternative producer or production process can be measured by how that producer or that process compares to that "most efficient way."

Higher education is not as fortunate as these goods-producing enterprises. The technology of university production (of learning and scholarship) is unclear and highly idiosyncratic to the institution, the department, and the individual professor. We do know that the per-student costs vary greatly. Thus, higher education is generally assumed to be more costly at research universities than at undergraduate colleges due to the higher salaries, lower teaching loads, and more extensive academic support (e.g., libraries, computer facilities, and other equipment) accorded the faculty of the research university. However, the direct instructional costs (especially so at the margin) of at least the freshmen and sophomores at a typical public research university can be rather low due to the prevalence of low-cost teaching assistants and very large lecture courses--in contrast to the typical public four-year college, where most instruction is carried out by regular faculty in moderate size classes, albeit with heavier average teaching loads. In the end, it is probably appropriate to claim that the per-student costs at a research university are higher than at a four-year college; but it must not be forgotten that this is so at least partly because of certain assumption and cost allocations which, while reasonable, are nonetheless judgmental and in certain instances questionable.

Among like institutions, most of the inter-institutional variation in per-student costs can be attributed either to the difference in the amenities provided to the students (recreational and cultural facilities, for example, or academic and student services support staff) or in the costs of faculty. Differential faculty costs, in turn, reflect not only in differences in compensation (which can be very great as between the part-time faculty, who provide so much of the teaching at low-cost colleges, and the full-time senior professoriate at prestigious private colleges), but also in that other major faculty expense, time, or low teaching loads, which is spent lavishly at wealthy colleges and not at all at the low-cost "access" colleges, public or private.

Howard Bowen, in his classic 1980 study of higher education costs, found great variation in costs among seemingly similar institutions with seemingly similar outcomes. Among a sample of research and doctoral-granting universities arranged from lowest to highest in per-student expenditures, the average university in the third quartile spent twice as much per student as the average in the second quartile, and the highest spending university in the sample spent almost seven and one-half times as much as the first quartile average. Variation among colleges was less, but the colleges in the third quartile of per student costs still spent about 50 percent more than the colleges in the second quartile. More recently, current fund expenditure data reported to the National Center for Education Statistics, looking only at the category of instruction, showed per student spending of $7573 at universities, $4788 at "other four year," and $2727 at two-year colleges.

This great spread in unit costs bothers some who see it as a signal of profligacy on the part of the highest-cost institutions. Bowen accounted for such variation with his revenue theory of costs, which stated that institutions raise all the money they can (which, in the case of highly endowed institutions with wealthy alumni that continue to attract children of affluent families, is a very large amount indeed), and spend all that they raise, purposefully and honorably, even though the amounts spent do not emerge from any discernible production function, as such, as in the industrial manufacture of goods.

But even if the "cost" we use to calculate the cost per student at Harvard were to mean the same thing as the "cost" in the per-student costs at, say, neighboring Wheelock College or at UMass-Boston, we still cannot say unambiguously that Wheelock and UMass-Boston are more efficient or more productive than Harvard. Cheaper per student, to be sure. But more efficient requires a measure of output that we do not have and probably could not find agreement upon if we could measure it. And if Harvard were to wish to contest its possible characterization as "inefficient" or "unproductive," it would point to the extraordinary knowledge and competence of its graduates, or to the lifetime of added benefits that it (Harvard) presumably helped to produce, or the value to the society (uncaptured by private lifetime income streams) that Harvard "created" along with the education of its undergraduates and the extraordinary scholarship of its faculty.

In short, without better agreement on the proper outputs of higher education, not to mention how to weight and how to measure them, we are left with cost per full-time equivalent student, as best as we can measure it, as an index of "productivity," and as something that should presumably get lower (or cheaper) in response to the demands from students, parents, and taxpayers that higher education become less costly.

Higher education’s inflation: the rising trajectory of per-student costs and tuitions.

Actually, the problem of unit costs and efficiency (or inefficiency) in higher education is less a function of the unit costs, per se, and more of the seemingly inexorable increase of such costs, and of the resulting tuition increases at rates considerably in excess of the rate of inflation. This is the "cost disease" first described by William Baumol as characteristic of the so-called productivity immune sectors of the economy: those sectors, generally labor intensive and with few opportunities for the substitution of capital or new production technologies for labor, such as live theater, symphony orchestras, social welfare agencies, and education. Unit costs in such enterprises track their increases in compensation. Because workers in such enterprises (e.g., faculty) typically get the same wage and salary increases as those in the productivity-sensitive, goods-producing sectors of the economy, where constant infusions of capital and technology produce real productivity gains and allow unit cost increases to be less than compensation increases, the unit costs in the productivity immune sectors will inevitably exceed those in the goods-producing sectors. Thus, the unit costs increases in higher education will be "above average." And since the rate of inflation is nothing more than a weighted average of many price increases, it is inevitable that the unit costs--and thus tuitions--in higher education will rise in normal years faster than the rate of inflation.

This is the normal, or "default" condition in higher education: unit costs increasing slightly in excess of the prevailing rate of inflation. The increase in tuition will be even greater--substantially exceeding the prevailing rate of inflation--to the extent that:

• state governments shift the cost burden from taxpayers to students and families through very high percentage tuition increases in the public sector; or

• private colleges put more of their marginal tuition dollar back into student aid, thus requiring even larger tuition increases to keep up with rising costs; or

• faculty compensation increases exceed compensation increases generally prevailing in the economy; or

• higher education is actually becoming more "input rich" in the form, say, of more technology per student, or higher faculty and staff to student ratios, or more costly physical plant per student.

In fact, all of these factors have been at work for the past decade or more, resulting in very substantial tuition increases in both the private and the public sectors. From 1985 to 1995, tuitions rose: at private universities by 105%; at private colleges by 108%; at public universities by 115%; and at public two-year colleges by 228%.

The factors listed above have entered in different degrees in different years for different sectors. The principal "culprits" in accounting for the very high rates of tuition increase in the priciest private colleges have been: (a) an enrichment of the amenities, (b) a lowering of faculty and staff to student ratios, and (c) the increase in institutionally-provided financial aid (i.e., a lowering of the net revenue yield from a dollar of tuition increase.) The "culprit" in the more recent case of rapidly rising tuitions in the public sector is overwhelmingly the withdrawal of state tax revenue, and a shift in relative cost burden from the taxpayer to the student and family.

The coming financial crisis: the diverging trajectories of costs and revenues

The natural trajectory of unit costs in higher education, as described above, is upward at rates in excess of prevailing rates of inflation. The corresponding rate of increase of anticipated revenues is substantially less, dampened by:

• increasing price resistance from upper middle class parents apparently less willing to accept tuition increases considerably in excess of inflation that takes increasing portions of family income;

• increasing price resistance from older students and from graduate and advanced professional students facing mounting debt loads;

• increasing resistance from governors and state legislatures facing other compelling public needs, less financial assistance from the federal government, and restive or angry state taxpayers;

• federal research support that has been increasing, but not in sufficient amounts to keep up with the increasing costs of "big science" or the number of quality proposals and principal investigators needing federal funding;

• academic health centers squeezed between cost-cutting insurers and low-cost alternative providers.

The resulting scenario is frightening, especially for the high-cost research universities, and for public colleges and universities facing declining state tax revenues--sometimes on top of increasing enrollment pressures--without the benefit of substantial endowments, wealthy alumni, internationally eminent scientists, or deep and affluent applicant pools. There are institutions that have turned around their fortunes through vigorous cost-cutting, restructuring, and moving smartly into a narrow market niche. But to many observers, the late 1990s will be a period of great uncertainty and continuing financial stress for most colleges and universities.

Sharing the Cost Burden: Who Pays, and Who Should Pay?

A third major issue in the financing of higher education is how these costs should be apportioned among the four parties: parents, students, taxpayers, and philanthropists:

1. parents: from current income, savings, or future income via increased indebtedness;
2. students: from savings, summer earnings, term-time earnings, and future earnings via loans or graduate tax obligations;
3. taxpayers: at federal, state, and local levels though taxes on income, sales, property, assets, business or manufacturing taxes (via the higher prices of the goods or services so taxed), or through the indirect "tax" of inflation brought about by public deficit spending;
4. philanthropists: either through endowments or current giving.

The sharing and shifting of the costs among these parties is a zero-sum game, where the lessening of the burden upon, or revenue from, for any one must be compensated either in a reduction of the underlying costs, or in a shift of burden to one or more of the other parties. Thus, if the state taxpayer share of higher education costs is to be lessened, that reduced share must either lead to reduced institutional costs, or must be shifted, probably to the student and/or parent via higher tuition. But if the parent cannot pay, or has enough political power to limit, by statute or regulation, a higher expected parental contribution (as happened when voter pressure forced the Congress to eliminate home equity from the assets that may be considered in the determination of "need" for the awarding of Federal Pell grants), the shift must all fall upon the student, principally through higher debt loads. (Precisely that scenario--lower taxpayer contributions, reduced institutional budgets, higher tuitions, level expected parental contributions, and much higher debt burdens--is exactly what has happened in the last decade or two.)

Among the policy questions sharpened by the "cost sharing" perspective are:

• With regard to the parental share: what is the appropriate amount that should be expected from parents to cover the higher educational costs of their children? Is this share to be a function only of current income, to be met by family "belt tightening?" Or are parents also expected to have saved from the past--or expected to borrow against the future? Are assets to be figured in the calculation of "need?" For how long does this expected parental financial responsibility continue: through the undergraduate years only, or until the age, say, of 24 or 25? And what of the expected contribution from a non-custodial parent?

• With regard to the student share: are there any limits to the hours of term-time work that is compatible with "full-time" study? Are there any limits to the amount of indebtedness that a student should be allowed to incur in pursuit of his or her education? To what extent should this limit be a function of the likely completion of studies, or of the anticipated earning power of the intended occupation or profession? Is this deferred payment obligation best handled via a conventional mortgage-type loan, or an income contingent obligation, or a graduate tax obligation--assuming that the present value of the repayment stream under all options must yield the same repayments, at least over a cohort of borrowers?

• With regard to the taxpayer share: to what degree should public financial support be linked to governmental ownership and ultimate control--as in the support of public higher education--or only to public support of certain costs, divorced from control, as in vouchers (e.g., Pell grants), able to support the private and even the proprietary sectors of higher education as easily as the public sector? Should amounts of taxpayer support per-student continue, as now, to be a function mainly of sector costs (for example, as between public research universities and public community colleges) and family income? Or should the government, through the financial aid system, begin to differentiate among (and presumably attempt to influence) the academic potential or performance of students, or the student’s choice of academic fields or intended occupations?

The cost of higher education borne by student and family

Most of the issues and questions above concern the proper share of the cost to be borne by the student and the parent, and especially, how much more can be borne by the student and/or parent for those students in the public sector, and how much, therefore, can be shifted from the taxpayer. There has been a considerable increase in costs borne by students and parents, mainly through higher tuitions, especially in the 1980s for private institutions, and in the 1990’s for public institutions, as shown in Table 1. (The Department of Education figures in Table 1 underestimate the increases in the higher cost institutions, which have generally experienced greater tuition increases, and also underestimate the actual total costs to the family, by omitting books, travel, entertainment, and other incidentals.) Table 1 Average Undergraduate Tuition, Room and Board and Percentage Increase, Various Sectors, 1974-74 - 1994-95

National Center for Education Statistics, Digest of Education Statistics 1995 (Washington DC: US Department of Education, October 1995); data from Table 306.

However, before drawing conclusions about either the relative shares borne by students, parents, and taxpayers or the impact of these increasing costs, we need to adjust for the impact of inflation, for increases in family incomes, and for the effects of financial assistance. Table 2 shows the cost of college/university in real terms (i.e., in constant dollars), and also in the percentage it took (after financial aid) of family incomes at selected levels, or percentiles, between 1979 and 1994.

The second adjustment is to look at the actual budgets, including books, travel, and incidentals, as well as tuition, room, and board, at various combinations of public or private and high or low cost (that is, various levels of "costliness") and for various family income levels. Table 3 shows how the expenses of private institutions, both "high cost" ($29,000 and low cost ($18,000), are met through combinations of family contributions, federal and state aid, loans, and institutional (philanthropic) grants for high, middle, and low income families. Table 4 is constructed the same way for public high and low cost institutions. Table 2 Average Undergraduate Tuition, Room, and Board in Constant (1975) Dollars as a Percentage of Family Income at the 25th, 50th, and 75th Percentiles of Family Income

National Center for Education Statistics, The Condition of Education 1996 (Washington DC: US Office of Education, 1996) p. 62.

  Table 3 Student Budgets and Sources of Support, Low, Middle, and High Income Families Private Institutions, High and Moderate Cost.

Notes: The actual mix of funds as between parental contributions, government grants, institutional grants, summer and term time earnings, and loans will vary by institutional aid policies, class of student (i.e., freshman or senior), and sometimes by the "desirability" of the student to the college (more desirable students get more institutional grants and need to assume less debt.) The numbers in Tables 3 and 4 are typical. Table 3 notes are in the endnotes.:

The summary "shares" at the base of each table include: for the taxpayer, the sum of federal and state grants plus the present value of the loan subsidies; for the parent, the expected family contribution minus an assumed "summer earnings" attributed to the student; for the student, term-time earnings and summer savings plus the present discounted value of expected loan repayments; and for philanthropists, the whole of the institutional grants. Table 4 Institutional Budget and Sources of Support, Low, Middle, and High Income Families Public Institutions, High and Low Cost

Notes: Notes from Table 3 apply with following differences: family contribution limited to Federal Methodology. State grants, student earnings, and loans may be apportioned in any way for the total student self-help. No institutional need-based grants are assumed for public institutions.

Some observations from Tables 3 and 4:

• The costs of college borne by the student and parent are high, but are very high only for relatively affluent families at high cost private institutions.

• Meeting the high costs at expensive private colleges and universities without substantial parental contributions requires both very high institutional, or philanthropic, support as well as very substantial student indebtedness.

• The key to financial accessibility lies less in the level of tuition, or even in the expected parental contribution, but in the student’s willingness to incur substantial indebtedness. Total student debt for four or more years of undergraduate education, plus three or more years of graduate or advanced professional school, can easily reach $50,000 to $100,000 or more, presenting the student with a repayment obligation that can either discourage advanced higher education altogether, or distort career and other life choices.

• The high-cost public institution (high tuition plus residency) requires substantial indebtedness, considerably diminishing the price advantage over the high cost private institutions.

The high tuition-high aid model of public support to higher education

From time to time, a proposal is made that direct public funding of state colleges and universities, at least for the support of instruction, be drastically reduced or eliminated altogether, with tuitions then raised to full or near-full cost, eliminating or greatly reducing what the proponents of this view call the "subsidy" to the students or families of students attending public colleges and universities. In place of direct state revenue, which currently supports anywhere from 60 to 90 percent of public four-year undergraduate instructional costs, the proponents of high tuition-high aid would substitute a very much expanded program of need-based grants, which would diminish as parental or student incomes rise, phasing out entirely and leaving a full or near-full cost public tuition for the family or independent student whose income, by some "means test," was deemed sufficient to pay the full or near full cost public tuition in addition to all of the other expenses of college.

The high tuition-high aid model is based on claims of efficiency and equity. The efficiency claim begins with the tenet of public finance theory that any public subsidy of a good or a service that consumers are likely to purchase anyway, in the absence or diminution of the subsidy, is an inefficient use of public tax dollars. The tax dollars that could be released, were public sector tuitions allowed to rise, could supposedly go toward public needs of greater priority such as more need-based student aid, or to non higher educational needs such as health care or public infrastructure, or else to tax cuts or public deficit reduction. And if the demand for public higher education should decline as a result of the lower subsidies and higher prices, this too might be a move in the direction of a more efficient use of the nation's resources, since subsidies can generate overproduction of a good or service, beyond the socially optimal level, and a higher priced public higher education might discourage some of the ambivalent, ill-prepared students who are assumed by some of the high tuition-high aid advocates to be taking up space and wasting precious resources in our public colleges and universities.

A corollary of the efficiency claim is that there exists, at least in some states, underutilized capacity in the private higher education sector that could be filled at relatively low marginal cost. A shift of tax dollars from the direct support of public colleges and universities to need-based student aid, portable to the private sector, would presumably shift enrollments there and would enable the socially optimal level of enrollments to be supported more in the private sector, but at a lower additional net cost to the taxpayer.

The equity argument in favor of high tuition-high aid is based on two assumptions: first, that public higher education is actually partaken of disproportionately by students from upper-middle income and affluent families; and second, that the state taxes used to support public higher education tend to be proportionate or even regressive, and thus to be paid for by many lower-middle income and poor families who are unlikely to benefit. Thus, the high tuition-high aid model of public higher education finance is claimed to be more equitable than across-the-board low tuition because it targets all public subsidy only on the needy and imposes full costs on students or families affluent enough to pay.

The Case Against the High Tuition-High Aid Model

The case against the high tuition-high aid model rests partly on the oversimplification and political naïveté of the case made on its behalf, summarized above, and partly on the case to be made for the very existence of a public higher education sector. The case against high tuition-high aid may be summarized by four points.

First, a "sticker price" of $15,000-$18,000 for a full-time year at a public college or university would almost certainly discourage many from applying, or even aspiring, to higher education, even with the prospect of financial aid or a lower tuition for those in need. The total costs to students and parents of a year of full-time study at a public four-year college or university, as shown in Table 4, make even public higher education today a relatively heavy financial lift for most families and for nearly all independent students. This fact alone does not fully negate the more theoretical arguments of "efficiency" and "equity" presented on behalf of full or near full-cost pricing for public higher education, as summarized above. But even with financial aid, a "sticker cost" of $15,000 to $20,000 a year for a supposedly public college might seem daunting to many students and their parents; and there can be little doubt but that those most daunted will be overwhelmingly from disadvantaged and non-white families.

Second, a high tuition-high aid policy would lessen the quality of public colleges and universities. The purpose of high tuition-high aid plans is to reduce state tax revenues currently going to public colleges and universities--even though some proponents claim that this revenue loss would be made up by increased revenue from the much higher tuitions paid by the more well-to-do. Private sector proponents of high tuition-high aid, however, make no secret of their aim to shift enrollments and tuition dollars of middle- and upper-middle income students (or at least the most attractive and able ones) from the public sector to the private sector. With little or no price advantage left in the public sector; with the resource advantage of large endowments, wealthy alumni, and the tradition of philanthropic support in the private sector; with the patina of elitism and selectivity that is associated with private colleges and universities (especially in the Northeast), and with greater constraints and burdens remaining on the public sector, many of the nation's 1,600 public colleges and universities would become places for students whom the private colleges, now priced the same to the students as the public ones, did not wish to accept. Such an erosion in the relative status and quality of public colleges and universities does not seem to be in the nation's public interest.

Third, high tuition does not guarantee high aid. Governors, legislators, and voters, continually pressed by more public needs than there are available resources, are likely to support a part of the public sector in which they perceive that they or their children have a stake. They are much less likely to maintain the financial aid, or "tuition discount," portion of the public higher educational budget when it is devoted almost exclusively to the poor. A not-unlikely consequences of a policy of high tuition-high aid, rather than the purported enhancements of efficiency and equity, are high tuition, lower taxes, inadequate aid, diminished access, and deteriorating public colleges and universities.

Fourth and fundamentally, the high tuition-high aid model is a denial of the appropriateness of higher education as public good. The nation's public colleges and universities have been built and supported over the last century and one-half not merely to provide a subsidized education to those who might not otherwise have an opportunity for higher education. Rather, voters and elected officials wanted public colleges and universities that would attract and hold the best and brightest students and scholars, serve society, aid the economy, and be a signal of the state’s culture. The high tuition-high aid model essentially denies most of these public purposes to public higher education and substitutes only a public subsidy for those who are too poor to afford what would become an otherwise unsubsidized, expensive, and essentially privatized, product. States need to reconsider whether these continue to be important reasons for supporting public higher education--or whether they mainly want to get needy students into some college, in which case high tuition-high aid, is almost certainly, as public finance theory correctly states, less expensive to the taxpayer.

Summary and Conclusions

Costs, productivity, and the financial health of American higher education: The financial fortunes of American colleges and universities will vary greatly by institution. Those relatively few private institutions with large endowments, traditions of generous alumni giving, and with deep and affluent student applicant pools will experience continuing cost pressures, but will be able to increase revenues commensurably and continue to prosper. Some public institutions similarly situated with deep and affluent applicant pools, with established traditions of philanthropic support, and with research strengths in areas of continuing public investment (e.g., biomedical and applied sciences) will prosper. Some less-endowed private institutions will seize a specialized market niche, either vocational (e.g., health-related professions) or cultural/ideological (e.g., conservative Christian) and, with good management and low faculty costs, will also prosper. Most private colleges and universities, however, will feel a fierce revenue squeeze that is primarily demographic: the lack of growth in the number of upper middle class parents able and/or willing to pay the high tuitions (or students willing to take on increasing levels of indebtedness.) And most public colleges and universities will continue to experience flat or declining state tax support, forcing even higher tuition, more program closures, and an increasing reliance of part-time and adjunct faculty.

The Productivity of Learning. As more and more colleges and universities exhaust the available cost-side measures for increasing productivity, interest is turning to increasing productivity by enhancing higher education’s output, or learning. Expressed another way, the major remaining productivity problem in higher education may not lie in excessive costs, but in insufficient learning a function of such features as: redundant learning; aimless academic exploration; the unavailability of courses at the right time; excessive non-learning time in the academic day, week, and year; insufficient use of self-paced learning; and insufficient realization of the potential of collegiate-level learning during the high school years. Enhancing the productivity of learning, then, would reduce vacation time and other time spent in other than learning activities, provide better advising and other incentives to lessen aimless curricular exploration, enhance opportunities for self-paced learning, perhaps through the aid of instructional technology, minimize curricular redundancy, and maximize the potential of college-level learning during the high school years.

Technology. Technology in the form of personal computers, new instructional software, the Internet, and instructional videocassettes, will profoundly affect the way faculty and advanced students conduct research, and it will enrich some teaching. However, aside from some pockets of distance learning and users of a "virtual university," generally limited to non-traditional and "technologically savvy" students, technology will mainly enable more and better, and not cheaper.

Shifting financial burden and rising tuitions: The shift in burden from parents and taxpayers to students, paid for with more part-time (and even more full time) work and much more debt, will continue, but there is reason to believe that the long-expected price resistance is happening.

Marketing: Marketing will become even more frenzied, and so will governmental efforts to "solve the problem" without spending any taxpayer revenue: tuition pre-payment, tax exempt savings plans, non need-based price discounting, income contingent repayment plans, and the like.

State Budgets: State higher education budgets will be smaller, but accompanied with more flexibility and with performance criteria, such as premiums to institutions that improve retention and completion rates.

Institutional missions and "restructuring:" Most institutions have been shaping their missions for years to adjust to: (a) more low-income, minority, older, part time, and place-bound students; (b) greater applied and vocational interest among most students, and (c) less revenue and the need to trim or eliminate that which is neither excellent nor popular nor central to the institution. In short, much of the vaunted "restructuring" that management consultants and many observers and analysts of higher education have been calling for as a solution to the financial dilemma of our colleges and universities is probably not a "solution" at all, for the simple reason that it has been going on for years. Most of the smaller and comprehensive colleges have reallocated resources and altered their programs and faculty profiles dramatically; many have changed mission altogether. Many of those that have not are either rich or private or both, and have no need to change dramatically (at least no need that can be called a public policy issue).

The largest class of institutions for which this is not necessarily the case would be those universities, largely regional and with minimal or uneven scholarly reputations, that continue to pursue the "research university" model but that are unlikely to penetrate the top ranks, measured by the scholarly prestige of their faculty or their graduate programs. Here, pressures to control costs are likely to focus on an increasing separation of funding for instruction and research, much as has occurred in the United Kingdom. If these measures are successful, the result could be less indirect public subsidization of faculty scholarship, a widening differentiation of faculty workloads, and a reduced administration overhead on competitive research grants.

Access and expanded participation: higher education as an engine for social mobility and equality: Although American higher education does more that the systems of any other nation to provide postsecondary opportunities to those from low socioeconomic backgrounds, the larger American society is becoming not only more unequal, but more predictable in the intergenerational transmission of higher educational attainment. In other words, the children of well educated, well-off parents generally achieve and persist in college, and those of the very poor, unless very bright and lucky, generally do not. The likely continuation of sharply rising public tuitions, political attacks against remedial courses, elimination of affirmative action considerations in admissions and financial aid, and the continuing conservative assault against curricula acknowledging multicultural values, will likely accentuate this pattern.

  Notes

¹The prevailing condition of austerity in higher education is described in such works as David W. Breneman, Liberal Arts Colleges: Thriving, Surviving, or Endangered? (Washington, DC: The Brookings Institution, 1994); Carol S. Hollins, Containing Costs and Improving Productivity in Higher Education (San Francisco: Jossey-Bass, 1992); D. Bruce Johnstone, Working Papers in a Time of Fiscal Crisis (Albany: State University of New York, 1992); William B Simpson, Managing With Scarce Resources (San Francisco: Jossey-Bass Publishers, 1993); and others.

 ²D. Bruce Johnstone, “The Costs of Higher Education: Worldwide Issues and Trends for the 1990s” in Philip G. Altbach and D. Bruce Johnstone, The Funding of Higher Education: International Perspectives (New York: Garland Publishing, 1993). For a perspective on the overwhelming condition of austerity in higher education in developing countries, and the similarity with US and Europe in both the analyses and policy solutions, see Adrian Ziderman and Douglas Albrecht, Financing Universities in Developing Countries (Washington, DC: The Falmer Press, 1995).

 ³National Center for Education Statistics, Current Funds Revenues and Expenditures of Institutions of Higher Education: Fiscal Years 1986 Through 1994 (Washington, DC: US Department of Education, 1996, Table 2, p. 3.

 ⁴National Center for Education Statistics, Digest of Education Statistics 1995 (Washington, DC: US Department of Education, 1995), Table 30.

  ⁵National Center for Higher Education Statistics, The Condition of Education 1996 (Washington DC: US Department of Education, 1996), p. 162.

  ⁶National Center for Education Statistics, Digest of Education Statistics 1995 (Washington, DC: US Department of Education, October 1995), Table 165.

  ⁷NCES, Condition of Education 1996, Indicator 7; NCES Digest 1995, Table 8, p. 17 and Table 6, p. 15.

 ⁸Ibid., Tables 165 and 233.

  ⁹Ibid., Tables 165 and 350.

  ¹⁰National Center for Education Statistics, Projections of Education Statistics to 2006, chapter 2, page 11.

  ¹¹The Challenge of the Century (Sacramento: California Postsecondary Education Commission, April 1995). The privately financed California Policy Center sets the number at 488,000; see Shared Responsibility: Strategies to Enhance Quality and Opportunity in California Higher Education, (San Jose: The California Higher Education Policy Center, 1996).

  ¹²William F. Massy and Robert Zemsky “The Lattice and the Ratchet,” Policy Perspectives, No. 3, 1990 (Philadelphia: The PEW Higher Education Research Program). Also, Zemsky and Massy, “Toward an Understanding of Our Current Predicaments,” Change, November/December 1995, pp. 41-49.

¹³ Howard  R. Bowen, The Costs of Higher Education (San Francisco: Jossey Bass, 1980) pp. 116-119.

 ¹⁴NCES Digest 1995, Table 343.

  ¹⁵H. Bowen (1980), pp. 19-26.

  ¹⁶William J. Baumol and William G. Bowen, Performing Arts: The Economic Dilemma (New York: The Twentieth Century Fund, 1966); also, William G. Bowen, The Economics of the Major Private Universities (Berkeley: Carnegie Commission on the Future of Higher Education, 1968).

  ¹⁷National Center for Education Statistics, Digest of Education Statistics 1995 (Washington DC: US Department of Education, October 1995) Table 306. See Table 1, below.

  ¹⁸For accounts of recent tuition increases, see: Arthur Hauptman, The College Tuition Spiral (Washington, DC: The College Board and The American Council on Education, 1990); Carol Francis, What Factors Affect College Tuition? (Washington DC: American Association of State Colleges and Universities, 1990); McPherson et al. op cit., 1993; and Michael Mumper, Removing College Price Barriers: What Government has Done and Why it Hasn’t Worked (Albany: SUNY Press, 1996).

  ¹⁹See, for example, the cover of the April 29, 1996 Newsweek: “$1000 a Week: the Scary Cost of College.”

 ²⁰ See National Center for Education Statistics, Student Financing of Graduate and First-Professional Education, Contractor Report (Washington DC: US Department of Education, March 1993).

  ²¹See David Leslie, and E. K Fretwell, Wise Moves in Hard Times: Creating and Managing Resilient Colleges and Universities (San Francisco: Jossey Bass, 1996).

  ²²See Breneman, David W., “Higher Education on a Collision Course with New Realities” (Washington, DC: The Association of Governing Boards, 1994, reprinted with permission by American Student Assistance).

 ²³ Some consider “business” a possible fifth party to bear a share of higher education costs.  However, grants from business to higher education can be viewed in one of three ways: (1) as the purchase of a service, whether research or specialized training, in which case the grant should cover the costs of the added service, but is not expected to bear a share of the core instructional costs of the college or university; (2) as voluntary contributions coming out of owner profits, in which case they would fall under “philanthropy,” as noted above; or (3) as contributions considered part of the cost of doing business, included in the price of the products and paid for by the general consumer, like a sales or consumption tax, in which case the incidence, or burden, is quite indistinguishable from that of other taxes and may be considered to be included, at least conceptually, in the “taxpayer” party noted above. See D. Bruce Johnstone, Sharing the Costs of Education (New York: The College Board, 1986).

  ²⁴For Table 3:
1. Low income is about $12,000--just before the “Federal Methodology” (used to calculate expected parental contributions for Pell grants) begins to call for a parental contribution.
2. Middle income is 1995 median family income ($38,752).
3. High income is about $100,000 with one other dependent child, not in college, and $300,000 in assets.
4. Most high cost private colleges go beyond the Federal Methodology and use The College Scholarship Service or a similar system that yields a higher family contribution. Many systems use the concept family contribution, which includes the summer savings assumption, here shown separately in line 6.
5. State need-based grant assumes approximately 75 percent of New York State Tuition Assistance Program (the most generous in the nation).
6. Sum of federal & state grants (rows 3 & 4) plus present value of loan subsidies for four years.
7. Sum of term-time and summer earnings plus present value of loan repayments discounted at 8 percent, assuming four years of interest subsidy
 
²⁵The case for “high tuition-high aid” was first popularized in W. Lee Hansen and Burton A Weisbrod, Benefits, Costs, and Finance of Public Higher Education (Chicago: Markham Publishing, 1969.  See also The Carnegie Commission on Higher Education, Higher Education: Who Pays? Who Benefits? Who Should Pay? (New York: McGraw-Hill, 1973), Frederick J. Fischer, “State Financing of Higher Education: A New Look at an Old Problem,” Change Magazine, January/February, 1990; and Michael S. McPherson, Morton Owen Schapiro, and Gordon C. Winston, Paying the Piper: Productivity, Incentives, and Financing in US Higher Education (Ann Arbor: The University of Michigan Press, 1993). The case against draws heavily on D. Bruce Johnstone, The High Tuition-High Aid Model of Public Higher Education Finance: The Case Against (Albany: The State University of New York, published for the National Association of System Heads, 1993).

 ²⁶D. Bruce Johnstone, Learning Productivity: A New Imperative for American Higher Education (Albany: The State University of New York, 1992).